Environmental taxation, tax competition, and harmonization

¤We thank Hormozd Gahvari for help in computations. This paper studies the tax competition problem in the presence of a global negative externality. It shows that economic integration causes the ¯rms to adopt the same or less polluting technologies, but it nevertheless increases aggregate emissions and low-ers welfare. Second, the paper examines the rami¯cations of partial tax harmonization policies. It shows that harmonizing commodity taxes above their unrestricted Nash equilibrium value may either increase or lower the equilibrium emission tax. Under the former, ¯rms opt for less polluting technologies, aggregate emissions decrease and welfare improves. On the other hand, if emission tax goes down, ¯rms will choose more polluting technologies, aggregate emissions will increase and welfare deteriorates. Fi-nally, harmonizing the emission tax above its unrestricted Nash equilibrium value, which leads the ¯rms to adopt a less polluting technology, also causes aggregate emissions to decline and overall welfare to increase