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Capital mobility and environmental policy: taxes versus TEP

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  • Yu-Bong Lai

    (National Chengchi University)

Abstract

Emission taxes and tradable-emission-permit (TEP) programs are two popular instruments used to regulate transboundary pollution. In a framework with capital, monopolistic competition, and interregional trade, we show that when capital is immobile, the two instruments are equivalent. When capital is mobile, the TEP program is more efficient. We also find that the presence of capital mobility reverses some conventional results. It may lead the non-revenue-raising instruments to be more efficient than the revenue-raising instruments, which counters the double-dividend hypothesis. With mobile capital, the initial allocation of permits affects the efficiency, which contrasts with the Coase theorem.

Suggested Citation

  • Yu-Bong Lai, 2023. "Capital mobility and environmental policy: taxes versus TEP," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 326-350, April.
    • Handle: RePEc:kap:itaxpf:v:30:y:2023:i:2:d:10.1007_s10797-021-09721-x
    DOI: 10.1007/s10797-021-09721-x
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    More about this item

    Keywords

    Capital mobility; Coase theorem; Double-dividend hypothesis; Emission tax; TEP program; Transboundary pollution;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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