The informational value of environmental taxes

Stefan Ambec and Jessica Coria

No 774, Working Papers in Economics from University of Gothenburg, Department of Economics

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.

Keywords: pollution; externalities; asymmetric information; environmental regulation; tax; standards; multiple policies; ratchet effect; nitrogen oxides (search for similar items in EconPapers)
JEL-codes: D04 D21 H23 L51 Q48 Q58 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2019-09
New Economics Papers: this item is included in nep-ene, nep-env, nep-pub, nep-reg and nep-res
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http://hdl.handle.net/2077/61743 Full text (text/html)

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 (2021)
Working Paper: The informational value of environmental taxes * (2020)
Working Paper: The informational value of environmental taxes (2019)
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