Abstract
This paper establishes a cross-industry pollution externality model. To explain a benevolent government, it may be possible to tax part of the welfare gains and use the revenue to compensate the affected polluted industry for the damage cost, thereby improving welfare. We show that the social welfare under emission tax with production subsidy is higher than the results of emission tax without production subsidy. The welfare of the polluted sector under emissions trading will be lower than the results of unbalanced budget environmental policy with subsidy. The welfare of the polluted labor union under lobby for compensation will be higher than the results of environmental policy with subsidy if the pollution damage and the weight on political contributions are sufficiently high.
Highlights
In recent years, cross-border and cross-industry pollution of air, water and soil has become the focus of environmental issues
We show that the social welfare under emission tax with production subsidy is higher than the case of emission tax without production subsidy
Unlike the previous literature, which only focused on environmental taxes, this study argues that the government may subsidize the damaged firm or labor; at the same time, this study discusses the economic effects of production subsidy for the damaged firm and labor subsidy for injured labor, and compares the difference in welfare effects between emissions tax with subsidy, emissions trading and lobbying
Summary
Cross-border and cross-industry pollution of air, water and soil has become the focus of environmental issues. In Europe, air pollution has significant impacts on human health (i.e., reduction of life expectancy) and the economy (i.e., increase of medical costs and reduction of productivity). Hans Bruyninckx, executive director of the Environment Agency, said well-designed environmental taxes can reduce pollution and increase resource efficiency in a very cost-effective way, and at the same time promote employment, economic growth and social fairness [21]. Some studies indicated that if the environmental tax revenues can help to reduce other distortion taxation, say labor tax, this can improve both environment and social welfare. The welfare of the polluted sector under emissions trading will be lower than the results of unbalanced budget environmental policy with subsidy. The rest of the paper is organized as follows: Section 2 is the literature review; Section 3 provides model settings and benchmarks; Section 4 discusses the environmental policy with production subsidy; Section 5 discusses environmental policy with labor subsidy; Section 6 explains the policy extensions, followed by the conclusion
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
