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Consumption pollution and taxes with endogenous firm locations and different market sizes

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  • Haitao Cheng

    (Hitotsubashi University)

Abstract

Consumption is an important source of greenhouse gas emissions. This study extends the footloose capital model to investigate consumption-generated emissions and consumption taxes in the presence of endogenous firm locations and different market sizes. We find that consumption taxes cause firm relocation and carbon leakage. That is, tax increase in one country induces firms to relocate to the other country; meanwhile, emissions decrease in that country but increase in the other country. We also show that when countries decide on their consumption taxes cooperatively to maximize the joint welfare, the optimal taxes are identical across them, regardless of different market sizes. However, under consumption tax competition, the larger country imposes a higher tax than the smaller country.

Suggested Citation

  • Haitao Cheng, 2023. "Consumption pollution and taxes with endogenous firm locations and different market sizes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1601-1632, December.
    • Handle: RePEc:kap:itaxpf:v:30:y:2023:i:6:d:10.1007_s10797-022-09768-4
    DOI: 10.1007/s10797-022-09768-4
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