Heterogeneity, climate change and stability of international fiscal harmonization

This paper analyses harmonization on fuel taxes between two coalitions. Harmonization is considered as a tool to mitigate greenhouse gas emissions, and reduce environmental costs. Domestic fuel producers can sell abroad, and their profits influence national governments in the negotiations. If all countries are identical, harmonization is environmental friendly provided environmental marginal damages are high. It is also economically profitable, but may be unstable if one of the coalitions is small enough. In this case, however, financial transfers between coalitions can stabilize harmonization. Nevertheless, countries can be heterogeneous with respect to the existence of a domestic producer. Heterogeneity introduces a new instability: not only the size, but also the composition of coalitions matters. Furthermore, the level of environmental damages also influences the stability of harmonization. In this case, intra- and inter-coalition financial transfers are necessary but not sufficient to stabilize harmonization.