Financing Public Expenditure via Emissions Taxation under International Emissions Trading: Is There Any Scope for Emission Tax Harmonization?

We address the issue of emission tax harmonization in a model featuring two representative firms located in two countries. Firms are subject to an international emissions trading system and to domestic emissions taxation; the latter generates public revenue but also implies implementation costs. Decentralized tax setting causes a spillover across countries via the permits price. Nonetheless, harmonization might imply a lower aggregate social welfare. This happens when uniform taxation prevents the exploitation of significant differences across countries in terms of costs and benefits of taxation. Finally, we identify cases where harmonization implies larger aggregate social welfare but lacks unanimous consent.