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The informational value of environmental taxes *

Stefan Ambec and Jessica Coria

Working Papers from HAL

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 second period. Updating standards, though, generates a ratchet effect since the low-cost firms might strategically hide their cost by abating no more than required by the standard. We provide conditions for the separating equilibrium to hold when firms act strategically. We illustrate our theoretical results with the case of NO x regulation in Sweden. We find evidence that the firms that are taxed experience more frequent standard updates.

Keywords: tax; standards; multiple policies; ratchet effect; nitrogen oxides; pollution; externalities; asymmetric information; environmental regulation (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg and nep-res
Note: View the original document on HAL open archive server: https://hal.inrae.fr/hal-02945523
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Journal Article: The informational value of environmental taxes (2021) Downloads
Working Paper: The informational value of environmental taxes (2021) Downloads
Working Paper: The informational value of environmental taxes (2019) Downloads
Working Paper: The informational value of environmental taxes (2019) Downloads
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