© The European Bank for Reconstruction and Development, 2003. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Economics of Transition Volume 11 (1) 2003, 123 – 152 Blackwell Publishing Ltd Oxford, UK ECOT The Economics of Transition 0967-0750 © The European Bank for Reconstruction and Development 2003 11 1 000 Original Article Optimal Dynamics of Environmental Quality in Economies in Transition Chimeli Optimal dynamics of environmental quality in economies in transition 1 Ariaster B. Chimeli* *International Research Institute for Climate Prediction, The Earth Institute at Columbia University, University Corporation for Atmospheric Research, 113 Monell Building, PO Box 1000, Palisades, NY 10964-8000, USA. E-mail: chimeli@iri.columbia.edu Abstract Environmental pressures in the transition economies of the post-Soviet era affect not only the quality of life for local populations, but also other key economic issues such as privatization and employment by posing obstacles to their progress. Most studies addressing the environment in transition economies are empirical or analyze the effect of environmental protection on economic variables without first establishing an underlying framework together with the optimal path of environmental quality during the transition. This paper presents such a framework and a policy rule for attainment of the optimal balance between capital and environmental quality in economies in transition. Further- more, the model shows that pollution taxes or tradable pollution permits are by them- selves insufficient to implement the social optimum in a decentralized economy. The results of the model are consistent with depressed economic activity in those eco- nomies during an initial phase, and with the diversity of environmental policies in both Central and Eastern Europe (CEE) countries and the Newly Independent States (NIS). JEL classification: Q20, P20, O13. Keywords: Environmental quality, transition economies, CEE, NIS. 1 This research has been developed with support of grant 200121/95-2 from the Brazilian Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) and of the program in Environmental and Resource Economics (pERE) of the University of Illinois at Urbana-Champaign. I would like to thank John Braden, Dan Bernhardt, Dick Brazee, Jan Brueckner, Lee Alston, Xavier Sala-i-Martin, Amy Ando and two anonymous referees for useful comments and suggestions. Any remaining errors are mine.