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Environmental tax competition under firm mobility and leakage

Author

Listed:
  • Robert C. Schmidt

    () (Humboldt-Universitaet zu Berlin)

  • Marco Runkel

    () (Technische Universitaet Berlin)

Abstract

The loss of competitiveness of domestic firms that operate in globalized markets remains a key obstacle to the implementation of effective carbon prices in a world without harmonized climate policies. The relocation of firms and productive activities is the most adverse consequence of unilateral carbon pricing. We analyze countries' strategic choice of environmental taxes implemented to control the emissions in an imperfectly competitive sector of the economy. Wage effects prevent all firms from locating in the same country when tax levels differ across countries. We demonstrate that environmental taxes are set at an inefficiently low level, compared to a non-strategic reference case where the environmental externalities between countries are neglected. The effect is particularly pronounced when firms are mobile. Hence, the possibility of firm relocation offers a plausible explanation why few countries have implemented effective carbon prices unilaterally until today. In our model, the relation between the strength of the environmental externalities and welfare is non-linear. Under some conditions, countries beneffit when externalities become stronger, due to a coordinating effect. In the absence of environmental externalities, tax competition vanishes.

Suggested Citation

  • Robert C. Schmidt & Marco Runkel, 2016. "Environmental tax competition under firm mobility and leakage," Working Papers 2015016, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
  • Handle: RePEc:bdp:wpaper:2015016
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    References listed on IDEAS

    as
    1. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," European Economic Review, Elsevier, vol. 50(2), pages 285-305, February.
    2. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(3), pages 211-225, October.
    3. Barrett, Scott, 1994. "Self-Enforcing International Environmental Agreements," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 878-894, Supplemen.
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    More about this item

    Keywords

    tax competition; labor market; location choice; pollution; carbon leakage;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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