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Environmental capital flight and pollution tax

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  • Lih-Jau Wang

Abstract

This paper analyzes the impacts of a production pollution tax on environmental capital flight and national product in a two-country static general equilibrium model with two-way foreign investment. It is assumed that the capital input in both countries is a composite good of domestic and imported capital. And pollution is assumed to originate in the production process. The productivity of capital in each country is negatively (or positively) related to the worldwide aggregate emissions. The analysis shows that when a domestic pollution tax is levied, domestic capital outflows increase and foreign capital inflows decrease for sufficiently high elasticities of substitution between labor (immobile input) and capital (mobile input) in both countries. Moreover, with negative transnational externalities, increases of a domestic pollution tax reduce domestic production and increase foreign production. The difficulty of substitution between immobile and mobile inputs hinders the optimal allocation of worldwide capital and national product. In this paper, the optimal pollution tax is based on global welfare maximization, not on global income maximization, taking into consideration the impact of income change on individual welfare. Therefore, an optimal pollution tax in the developing country should be lower for a given rate of pollution. Copyright Kluwer Academic Publishers 1995

Suggested Citation

  • Lih-Jau Wang, 1995. "Environmental capital flight and pollution tax," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 5(3), pages 273-286, April.
    • Handle: RePEc:kap:enreec:v:5:y:1995:i:3:p:273-286
    DOI: 10.1007/BF00691520
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    References listed on IDEAS

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    1. Lawrence H. Goulder & John B. Shoven & John Whalley, 1983. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium Tax Analysis Model," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 333-368, National Bureau of Economic Research, Inc.
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    3. Hoel, Michael, 1991. "Global environmental problems: The effects of unilateral actions taken by one country," Journal of Environmental Economics and Management, Elsevier, vol. 20(1), pages 55-70, January.
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    5. Lawrence H. Goulder & John B. Shoven & John Whalley, 1982. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium," NBER Working Papers 0919, National Bureau of Economic Research, Inc.
    6. Bovenberg, A Lans, 1989. "The Effects of Capital Income Taxation on International Competitiveness and Trade Flows," American Economic Review, American Economic Association, vol. 79(5), pages 1045-1064, December.
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    8. Richard F. Kosobud & Thomas A. Daly, 1984. "Global Conflict or Cooperation over the CO2 Climate Impact?," Kyklos, Wiley Blackwell, vol. 37(4), pages 638-659, November.
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    10. Nordhaus, William D., 1993. "Rolling the 'DICE': an optimal transition path for controlling greenhouse gases," Resource and Energy Economics, Elsevier, vol. 15(1), pages 27-50, March.
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    Cited by:

    1. Michael Rauscher, 2001. "International Factor Movements, Environmental Policy, and Double Dividends," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 187-216, National Bureau of Economic Research, Inc.
    2. Rauscher, Michael, 2001. "International trade, foreign investment, and the environment," Thuenen-Series of Applied Economic Theory 29, University of Rostock, Institute of Economics.
    3. Christoph Böhringer & Victoria Alexeeva-Talebi, 2011. "Unilateral climate policy and competitiveness: The implications of differential emission pricing," Working Papers V-338-11, University of Oldenburg, Department of Economics, revised Jun 2011.
    4. Lakatos, Csilla & Walmsley, Terrie, 2011. "Dispute Settlement at the WTO: Impacts of a No Deal in the US-Brazil Cotton Dispute," Conference papers 332059, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
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    6. repec:zbw:hohpro:338 is not listed on IDEAS

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