Environmental Policy and Optimal Taxation in a Decentralized Economic Federation

Thomas Aronsson (), Thomas Jonsson () and Tomas Sjögren ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Thomas Jonsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Tomas Sjögren: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

No 669, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper deals with environmental policy in an economic federation, where each national government faces a mixed tax problem. We assume that the federal government sets emission targets, which are implemented at the national level. We also assume that the economic federation is decentralized, meaning that the national governments are first movers vis-a-vis the federal government. Our results show that each country uses it policy instruments, at least in part, to influence the emission target. This has several implications; first, the commodity taxes do not satisfy the so called additivity property often emphasized in earlier literature and, second, it provides an argument for using distortionary labor income taxation.

Keywords: Income and commodity taxation; economic federation; environmental policy (search for similar items in EconPapers)
JEL-codes: D62 H21 H70 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env and nep-pbe
Date: 2006-01-13
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