Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 669: Environmental Policy and Optimal Taxation in a Decentralized Economic Federation

Thomas Aronsson (), Thomas Jonsson () and Tomas Sjögren ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Thomas Jonsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Tomas Sjögren: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: This paper deals with environmental policy in an economic federation, where each national government faces a mixed tax problem. We assume that the federal government sets emission targets, which are implemented at the national level. We also assume that the economic federation is decentralized, meaning that the national governments are first movers vis-a-vis the federal government. Our results show that each country uses it policy instruments, at least in part, to influence the emission target. This has several implications; first, the commodity taxes do not satisfy the so called additivity property often emphasized in earlier literature and, second, it provides an argument for using distortionary labor income taxation.

Keywords: Income and commodity taxation; economic federation; environmental policy

JEL-codes: D62; H21; H70

29 pages, January 13, 2006

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