Emission Taxes and Border Tax Adjustments for Oligopolistic Industries

Abstract

AbstractWe examine the welfare consequences of an emission tax with and without a border tax adjustment (BTA) for an imperfectly competitive industry, where intra‐industry trade arises between countries. BTA allows a government to impose a pollution‐content tariff on imports and refund an emission tax for export sales. We analyse the structure of an optimal emission tax with BTA when a government chooses its emission tax rate to maximize its national welfare. We show that the optimal emission tax policy with BTA achieves greater national welfare and higher environmental quality than the optimal policy without BTA.