Emission taxes and optimal refunding schemes

Hans Gersbach, CER-ETH Center of Economic Research at ETH Zurich

Abstract

We examine how refunding emission taxes to firms dependent on market shares should be designed. While refunding is harmful under perfect competition, a first-best self-financing tax/tax-refunding scheme exists if the marginal damage from pollution exceeds the marginal distortion in an imperfectly competitive output market with symmetric firms. Under pre-investment in cleaner technology with short-term abatement opportunities, a first-best refunding scheme exists if pollution refunding can be made dependent on both market and investment shares.