We examine how emission taxes should be refunded to firms in order to create optimal incentives to invest in cleaner technologies. Since refunds cannot be made dependent on investments, an alternative way is to give back taxes to firms according to market shares. We show that universally applicable refunding schemes must be linear in market shares. Moreover, a socially optimal tax/tax refunding scheme exists if pollution is proportional to output and firms compete a la Cournot. If short-term abatement technologies exist, tax/tax refunding schemes can still provide second-best allocations. If firms are price takers, however, refunding taxes according to market shares is harmful. Since imperfect competition is a prominent phenomenon in many polluting industries, the design of socially optimal refunding schemes is an essential part of environmental regulation.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 325.
Length: Date of creation: 2000 Date of revision: Handle: RePEc:ces:ceswps:_325
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Find related papers by JEL classification: L50 - Industrial Organization - - Regulation and Industrial Policy - - - General Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
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