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Direct and Indirect Taxes in Pollution Dynamics

Author

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  • Vladimir Smirnyagin
  • Aleh Tsyvinski
  • Xi Wu

Abstract

Analyzing the universe of federal environmental regulations in the U.S., we construct a measure of regulations—direct taxes on pollution. Analyzing the universe of firms’ investor disclosures, we construct a measure of material environmental concerns—indirect taxes on pollution. These two empirical measures are new to the environmental regulations literature. Thirdly, we document an important new fact that the cross-sectional distribution of pollution changes is lumpy. We build a dynamic heterogeneous firm model with non-convex adjustment costs that fits the cross-sectional pollution evidence. The model explains half of the pollution decline in U.S. manufacturing over the last two decades due to direct and indirect taxes. We show that the dynamics of direct taxes (environmental regulations) and indirect taxes (environmental concerns), non-convex adjustment costs, and idiosyncratic productivity shocks are key determinants of pollution dynamics in U.S. manufacturing.

Suggested Citation

  • Vladimir Smirnyagin & Aleh Tsyvinski & Xi Wu, 2024. "Direct and Indirect Taxes in Pollution Dynamics," NBER Working Papers 32852, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32852
    Note: CF EEE EFG
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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • H0 - Public Economics - - General

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