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The informational value of environmental taxes

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  • Ambec, Stefan
  • Coria, Jessica

Abstract

We propose informational spillovers as a new rationale for the use of multiple policy instruments to mitigate a single externality. We investigate the design of a pollution standard when the firms’ abatement costs are unknown and emissions are taxed. A firm might abate pollution beyond what is required by the standard by equalizing its marginal abatement costs to the tax rate, thereby revealing information about its abatement cost. We analyze how a regulator can take advantage of this information to design the standard. In a dynamic setting, the regulator relaxes the initial standard in order to induce more information revelation, which would allow her to set a standard closer to the first best in the second period. Updating standards, though, generates a ratchet effect since the low-cost firms might strategically hide their cost by abating no more than required by the standard. We provide conditions for the separating equilibrium to hold when firms act strategically. We illustrate our theoretical results with the case of NOx regulation in Sweden. We find evidence that the firms that are taxed experience more frequent standard updates.

Suggested Citation

  • Ambec, Stefan & Coria, Jessica, 2019. "The informational value of environmental taxes," TSE Working Papers 19-1036, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:123350
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    Cited by:

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    2. Heijmans, Roweno J.R.K. & Engström, Max, 2024. "Time Horizons and Emissions Trading," Discussion Papers 2024/2, Norwegian School of Economics, Department of Business and Management Science.
    3. Ambec, Stefan & De Donder, Philippe, 2022. "Environmental policy with green consumerism," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    4. Liu, Guangqiang & Yang, Zhiqing & Zhang, Fan & Zhang, Nan, 2022. "Environmental tax reform and environmental investment: A quasi-natural experiment based on China's Environmental Protection Tax Law," Energy Economics, Elsevier, vol. 109(C).
    5. John Harvey Vargas-Cano & David Tobón-Orozco & Carlos Vasco-Correa, 2023. "The Protection of the Capacity for Resilience in the Provision of Drinking Water from Hybrid Environmental Policy Instruments," Sustainability, MDPI, vol. 15(11), pages 1-17, May.

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    More about this item

    Keywords

    pollution; externalities; asymmetric information; environmental regulation; tax; standards; multiple policies; ratchet effect; nitrogen oxides.;
    All these keywords.

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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