In this paper we highlight aspects related to the links among unemployment, international capital mobility, and tax policies in a small open developing economy. Without international capital mobility, the joint optimal trade and environmental policies require a zero tariff and an emission tax lower than the Pigouvian tax. With international capital mobility and a capital tax (subsidy), the optimal emission tax rate is smaller (larger) compared to the rate when capital is untaxed. When both the emission tax and the capital tax/subsidy are jointly chosen optimally, then the optimal policy on capital is a lower subsidy, or even a tax, compared to the standard capital subsidy of the no pollution case. Copyright � 2007 The Authors.
We construct a model of two regions with cross‐border pollution, and with inter‐regional (regional capital mobility [RCM]) or international (international capital mobility [ICM]) capital mobility. Each region uses emission taxes, or intra‐regionally, or inter‐regionally tradable emission permits to reduce pollution. We show that the non‐cooperative settings of all three instruments are always inefficient relative to their cooperative settings. When regions are symmetric, then (i) with RCM the non‐cooperative setting of intra‐regionally tradable emissions permits is welfare superior to that of the other two instruments, (ii) with ICM the non‐cooperative settings of intra‐regionally tradable emission permits and of emission taxes are equivalent and superior to that of inter‐regionally tradable emission permits, and (iii) with ICM the three instruments are equivalent only when cross‐border pollution is perfect.
We build a two asymmetric regions model with cross‐border pollution related to production. Each region issues emission permits and revenues from their sales finance public pollution abatement. The decentralized level of emission permits is efficient when permits are interregionally tradable and cross‐border pollution is perfect. This result is robust in a variety of cases—for example, when (i) capital is immobile or internationally mobile or only mobile between the two regions, and (ii) revenue from permits sales is transferred to a federal authority.
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