Foreign Eco-Technology Licensing Strategy and the Coordination of Import Tariff and Emission Tax Policies

This study investigates eco-technology licensing strategy by a foreign firm that offers two-part tariff licensing contracts (i.e. combination of a per unit royalty and a lump-sum fee) to a domestic polluting firm under the strategic import tariff in the presence of an exogeneous emission tax. We particularly consider the possibility of negative royalty (or subsidised royalty per unit production) by the foreign licensor and compare the two different licensing cases with and without non-negative royalty. We find that given a lower level of emission tax, the licensor may choose negative royalty only when the import tariff is high. We also find that the optimal import tariff with non-restrictive licensing contract with a negative royalty is higher than that with restrictive one, but allowing a negative royalty is better for domestic welfare unless the emission tax is so high (or environmental damage is serious). Finally, we show find that the optimal import tariff under the two-part tariff licensing might have a negative relationship with an emissions tax.