The impacts of firms’ mobility on the environmental policy

Abstract

This paper investigates the impacts of firms’ mobility on the environmental policy. We focus on two issues. The first one is the relationship between the stringency of environmental regulation and the distribution of environmental rents; the second one is how the interjurisdictional competition shapes the selection of instruments. We find that, in the absence of firms’ mobility, an instrument that allocates more rents to firms will give rise to a lower pollution tax rate, but, in the presence of mobile firms, this result may be reversed. Another finding is that the interjurisdictional competition for mobile firms can lead the governments to adopt non-revenue-raising instruments. This provides an explanation for the prevalence of such instruments without relying on political reasoning. We also find that a larger number of jurisdictions may tighten the regulation, which differs from the conventional results.