The impact of uncertain environmental regulatory policy on optimal plant location and anti-pollution technology selection

This paper considers pollution tax rate functions that decrease progressively with distance in order to examine in depth the effectiveness of pollution tax incentives. We find that pollution tax incentive policies, regardless of the level of incentives or the size of increases in incentives, can impel the firm to purchase anti-pollution equipment. However, increases in the size of incentives cause the firm to relocate back to city centers. The size of incentive increase thus has an uncertain impact on location choice, suggesting that increases may also produce the opposite of the intended effect by “pulling” plants back to city centers. This confirmed the argument of Oates and Baumol (Economic analysis of environmental problems, Columbia University Press, New York, 1975 , p. 104) that taxes on polluting activities may fail to do their job with full effectiveness. In addition, we have also found that increased uncertainty over pollution tax policies tends to increase purchases of anti-pollution equipment for a risk-averse firm. This impact is unrelated to the investment flexibility of anti-pollution equipment. These results are different from those of Carlsson regarding risk-neutral firms. In addition, the findings of this study that increases in pollution taxes tend to cause a firm to purchase additional anti-pollution equipment and leave city centers differ from those of Hwang and Mai in the latter result. Copyright Springer-Verlag 2013