The Impact of Policy Diffusion on Optimal Emission Taxes

Peter Michaelis () and Thomas Ziesemer ()
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Peter Michaelis: University of Augsburg, Department of Economics
Thomas Ziesemer: University of Augsburg, Department of Economics

No 318, Discussion Paper Series from Universitaet Augsburg, Institute for Economics

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.

Keywords: strategic environmental policy; emission tax; policy diffusion; sequential decision-making (search for similar items in EconPapers)
JEL-codes: F18 Q55 Q58 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-ene, nep-env and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:aug:augsbe:0318

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