The informational value of environmental taxes

Stefan Ambec and Jessica Coria

Journal of Public Economics, 2021, vol. 199, issue C

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 low-cost 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)
JEL-codes: D04 D21 H23 L51 Q48 Q58 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
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)
Working Paper: The informational value of environmental taxes (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:199:y:2021:i:c:s004727272100075x

DOI: 10.1016/j.jpubeco.2021.104439

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