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Taxing the invisible: Unobservable pollution and green transition in a multi-sector framework

Author

Listed:
  • Lamantia, Fabio
  • Radi, Davide

Abstract

The rising demand for green products has encouraged firms to adopt sustainable practices, but it has also intensified the phenomenon of greenwashing. We develop a partial-equilibrium model of a multi-sector economy in which firms undertake both observable and unobservable abatement activities, creating incentives for greenwashing. The model incorporates the threat of nonpoint-source pollution taxes or taxes on individual emissions. Transition risk may induce some industries to sharply reduce, or even discontinue, production when expected environmental damages are high, yielding piecewise-smooth production dynamics of environmental degradation. We show that: (1) the threat of taxing observable pollution mitigates pollution stock; (2) very high expected tax may generate endogenous oscillations; (3) unobservable pollution amplifies this risk; and (4) when pollution is unobservable, consumer extra willingness to pay for green products does not eliminate zero-degradation equilibria.

Suggested Citation

  • Lamantia, Fabio & Radi, Davide, 2026. "Taxing the invisible: Unobservable pollution and green transition in a multi-sector framework," Journal of Economic Behavior & Organization, Elsevier, vol. 246(C).
    • Handle: RePEc:eee:jeborg:v:246:y:2026:i:c:s0167268126001708
    DOI: 10.1016/j.jebo.2026.107584
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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment

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