The impact of policy diffusion on optimal emission taxes

Peter Michaelis () and Thomas Ziesemer ()

Environmental Economics and Policy Studies, 2013, vol. 15, issue 3, 259-270

Abstract: We incorporate the process of policy diffusion (i.e., the uncoordinated dissemination of policies among countries) into a probabilistic two-country-model of strategic environmental policy. Contrary to the usual setting with simultaneous decision-making, we consider the impact of sequential decision-making: In the first step, the domestic government introduces an emission tax; in the second step, policy diffusion occurs with a certain probability; and in the third step, the firms decide on output quantities. Within this framework, we analyze how the prospect of policy diffusion, motivated by a higher damage parameter in the domestic country, influences the optimal domestic emission tax. We show that if the damage parameter in the foreign country is sufficiently high, policy diffusion will occur which leads to higher tax rates and higher welfare compared to the equilibrium resulting from simultaneous decision-making. Moreover, we show that an increase in the domestic tax rate also increases the probability that the foreign country adopts the tax policy. Copyright Springer Japan 2013

Keywords: Strategic environmental policy; Emission tax; Policy diffusion; Sequential decision-making; F18; Q55; Q58 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s10018-013-0055-9

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