Abstract
This paper investigates the impacts of firms’ mobility on the environmental policy. We focus on two issues. The first one is the relationship between the stringency of environmental regulation and the distribution of environmental rents; the second one is how the interjurisdictional competition shapes the selection of instruments. We find that, in the absence of firms’ mobility, an instrument that allocates more rents to firms will give rise to a lower pollution tax rate, but, in the presence of mobile firms, this result may be reversed. Another finding is that the interjurisdictional competition for mobile firms can lead the governments to adopt non-revenue-raising instruments. This provides an explanation for the prevalence of such instruments without relying on political reasoning. We also find that a larger number of jurisdictions may tighten the regulation, which differs from the conventional results.
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Notes
Goulder et al. (1997) have indicated that the distinction between the revenue-recycling effect and revenue-raising is important. Revenue-recycling refers to the use of environmental tax revenues to reduce other distortionary taxes or to provide public goods, rather than distributing the tax revenues in a lump-sum manner. In this paper, the revenue-raising instruments refer to the instruments that can generate the revenue-recycling effect.
We ignore the agglomeration effect, which implies that \(R'>0\). We will briefly discuss what happens when \(R' > 0\) in Sect. 6.
Alternatively, we can assume that the firms recognize that their emission decision can affect r. If so, then any positive r will reduce the effective pollution tax rate. Consider an extreme case where all the pollution tax revenues are returned to the polluting firms, in which case the effective pollution tax rate is equal to zero, and the imposition of the tax does not curb any pollution. This result conflicts with the real situation such as the tax on the emissions of \({\mathrm{NO}}_{{x}}\) in Sweden.
Alternatively, we can interpret the pollution tax revenues as being used to cut other distortionary taxes, and the tax recycling generates a constant marginal benefit.
In our framework, the two schemes are equivalent.
We acknowledge that the empirical evidence about this elasticity is mixed. Assuming that \(\varepsilon < 1\) seems more reasonable, because the demand for energy is generally insensitive to changes in price (Cooper 2003).
Subtracting \(D'\) from (5) gives \(t^c - D' = [(1-\varepsilon )(\theta - 1)(1-\lambda )]/ [1 - (1 - \varepsilon _j)[\lambda _j + \theta (1-\lambda _j) ] ] \ge 0\,.\)
The derivation can be found in Appendix (1).
Given \(n_j\), an increase in \(\lambda _j\) enlarges the firm’s rebated tax revenues by the amount \(\,t_j e_j\).
The welfare function is not necessarily concave with respect to t, because the profit function of the firm as a function of tax rate might be convex. I am grateful to the editor for pointing this out. The second-order condition is satisfied, provided that, e.g., \(B''\) is negative and significantly large. This can be seen by differentiating the first term in the square brackets in (12) with respect to t, which gives: \(-(1-m) B'' \partial n/\partial t\). When \(B'' < 0\), \(-(1-m) B'' \partial n/\partial t\) is less than zero. If the product of these terms is sufficiently large (in absolute term), the differentiation of (12) with respect to t is less than zero, and the second-order condition is satisfied.
The selection of the value of \(\lambda \) is not confined to the optimal \(\lambda \); any \(\lambda \) that is between 0 and 1 works.
Some papers have discussed the effects of the distribution of the environmental rents (or the pollution tax revenues) on the stringency of pollution controls [see Fullerton and Metcalf (2001), and Bento and Jacobsen (2007)]. However, these papers consider such a distribution in a discrete style, and a feature of this present paper is to specify the distribution of the environmental rents as a continuous variable. Because of this feature, we can investigate how a change in \(\lambda \) affects the pollution tax rate.
Both France and Sweden have imposed taxes on NO\(_x\). The tax revenues are used to cut other taxes in France, while the Swedish government returns all the tax revenues to the polluting firms. The tax rate in Sweden is much higher than that in France (Sterner 2003, chap. 24).
With the marginal pollution damage being constant, differentiating (20) with respect to \(\lambda \) gives \(\mathrm{d}^2 W^o/\mathrm{d}\lambda ^2 = -[e n \varepsilon \theta /( 1 - \lambda ( 1 - \varepsilon ) )] \cdot \mathrm{d}t/\mathrm{d}\lambda \). The second-order condition for the maximization of the social welfare, which requires \(\mathrm{d}^2W^o/\mathrm{d}\lambda ^2 < 0\), implies that \(\mathrm{d}t/\mathrm{d}\lambda \) should be positive.
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Acknowledgements
The author is grateful to two anonymous referees and the editor Ken-Ichi Akao for their valuable comments and suggestions. The remaining errors are the author’s sole responsibility. Financial support from the Ministry of Science and Technology [106-2410-H-004 -003-] is gratefully acknowledged.
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Appendix
Appendix
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1.
The derivation of (9):
Differentiating (8) with respect to \(t_j\) gives the following:
$$\begin{aligned} R'_j \frac{\partial n_j}{\partial t_j} - e_j [1 - \lambda (1 - \varepsilon _j)] = R'_i \frac{\partial n_i}{\partial t_j}\,. \end{aligned}$$(23)Then, differentiating \(\sum _i n_i = N\) with respect to \(t_j\) gives:
$$\begin{aligned} \frac{\partial n_i}{\partial t_j}= \frac{-1}{J - 1} \frac{\partial n_j}{\partial t_j}\,. \end{aligned}$$(24)Inserting (24) into (23), and, after some manipulations, leads to (9).
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2.
The derivation of (20):
From (12), we have:
$$\begin{aligned} \beta = \frac{\theta n (1 -\lambda ) (1 - \varepsilon ) R'}{1- \lambda (1-\varepsilon )} + \frac{D' n \varepsilon R'}{t [1 - \lambda (1 -\varepsilon )]}\, , \end{aligned}$$(25)where
$$\begin{aligned} \beta = - B'(1-m) + \bar{n} m R' - \theta (1-\lambda )(1 - m)t e + D' e (1 - m)\,. \end{aligned}$$With the help of \(\beta \), (18) can be rewritten as follows:
$$\begin{aligned} \frac{\partial W^o}{\partial \lambda } = -\frac{t e}{R'}\left[ -\beta + \theta n R' \right] . \end{aligned}$$(26)By inserting (25) into the above equation, and after some manipulations, we obtain (20).
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Lai, YB. The impacts of firms’ mobility on the environmental policy. Environ Econ Policy Stud 21, 349–369 (2019). https://doi.org/10.1007/s10018-018-0233-x
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DOI: https://doi.org/10.1007/s10018-018-0233-x