Tax and subsidy policy for domestic air pollution with asymmetric local and global spillover effects

Abstract

In response to the threat of climate change and air pollution, we present a uniform tax and flexible subsidy policy which considers both asymmetric local and global pollution spillover effects between regions within a country. By adopting the proposed tax and subsidy (TS) policy, the central government can coordinate tax distribution as subsidies according to each region's economic and technological level to reach allocation efficiency. The subsidy coefficient matrix settings are illustrated in two typical policy design principles: the polluter-pays principle and the beneficiary-pays principle. These two illustrations show that the central government can ensure air pollution control's fairness and efficiency from a forward-looking economic development perspective through the adjustable subsidy. We also discuss the TS policies in two widespread realistic scenarios in developing countries: TS with lower bound emissions and TS with upper bound emissions. The generality of our approach allows for the provision of public goods.