Abstract
We examine how refunding emission taxes to firms dependent on market shares should be designed. While refunding is harmful under perfect competition, a first-best self-financing tax/tax-refunding scheme exists if the marginal damage from pollution exceeds the marginal distortion in an imperfectly competitive output market with symmetric firms. Under pre-investment in cleaner technology with short-term abatement opportunities, a first-best refunding scheme exists if pollution refunding can be made dependent on both market and investment shares.
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