Green Alliances and the Role of Taxation

Abstract

We examine two alternative strategies that an environmental group can embark when interacting with a firm. The first one which is already discussed in the literature is when the group campaigns against the firm. The second one which has not been modelled in the literature is when the group collaborates with the firm (green alliance) to reduce the cost of the cleaner technology. We look at the case of both options being available for the group in a setting with an environmental tax. One of the main results of the paper argues that for higher taxation the conflict scenario is more likely to happen, implying that collaboration and a more stringent environmental policy are substitutes. This identifies a previously unexamined and possibly adverse effect of public policy on environmental quality because it weakens the impact of the pollution tax on emission intensity. We also characterise the optimal tax that maximises social welfare and find that under pure conflict –when conflict is the only option for the environmentalists– optimal tax is higher than when the group can choose to act against or join forces with the firm, indicating that a less stringent environmental policy is needed in the latter scenario.