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Taxing pollution and profits: A bargaining approach

Yu Pang ()

Energy Economics, 2019, vol. 78, issue C, 278-288

Abstract: This paper analyzes the taxation of polluting firms in a model where the government and firms bargain over emissions and profits taxes. We demonstrate that under reasonable assumptions, the bargaining position of firms is a determinant of the profits tax yet has no impact on the emissions tax. The emissions tax is affected by market structure, firm technologies, and environmental awareness. An emissions tax may not be imposed in some circumstances, although it would raise public revenue and reduce pollution. In that case, the transfer of profits taxes to people can be used to address their environmental suffering. We then extend the model to consider that the government spends a fraction of tax revenue to partner with firms in pollution abatement. Public environmental spending will increase with the demand for polluting goods and facilitate a cut in the emissions tax, which leads to a higher output level and less abatement effort at firms.

Keywords: Emissions tax; Profits tax; Nash bargaining; Public environmental expenditure (search for similar items in EconPapers)
JEL-codes: C78 H23 H25 Q58 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.eneco.2018.11.018

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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