The informational value of environmental taxes

Stefan Ambec and Jessica Coria

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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 future. Updating standards, though, generates a ratchet effect since a lowcost firm might strategically hide its cost by abating no more than required by the standard. We characterize the optimal standard and its update across time depending on the firm's abatement strategy. We illustrate our theoretical results with the case of NOx regulation in Sweden. We find evidence that the firms that pay the NOx tax experience more frequent standard updates and more stringent revisions than those who are exempted.

Keywords: Pollution; Environmental policy; Tax; Asymmetric information; Ratchet effect; Multi-governance; Policy overlap (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-ene, nep-env, nep-gth, nep-pbe, nep-reg and nep-res
Note: View the original document on HAL open archive server: https://hal.science/hal-03352820v1
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Citations: View citations in EconPapers (9)

Published in Journal of Public Economics, 2021, 199, ⟨10.1016/j.jpubeco.2021.104439⟩

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Related works:
Journal Article: The informational value of environmental taxes (2021)
Working Paper: The informational value of environmental taxes (2021)
Working Paper: The informational value of environmental taxes * (2020)
Working Paper: The informational value of environmental taxes (2019)
Working Paper: The informational value of environmental taxes (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03352820

DOI: 10.1016/j.jpubeco.2021.104439

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