Domestic Pigouvian Taxation and Technological Spillovers Under International Emissions Trading

Abstract

I model an economy featuring two representative firms in two countries, one in each country, where one firm innovates and generates technological unilateral spillovers. I analyze a partial equilibrium model in two different scenarios: in the first one, the innovating firm is under a domestic emissions taxation, while the other country does not implement any environmental policy. Government of the innovating firm introduces a tax credit aimed at incentivizing investment in cleaner abatement technologies. Finally, in the second scenario, the two countries take part to an international ETS. Comparisons among results from different scenarios are shown in the analytical part of the study. I conclude that, under specific assumpitons, overlapping regulations might be welfare improving.

Keywords: Pigouvian Taxation, International ETS, policy mix, trans- boundary pollution, international technological spillover.

JEL Classification: Q58, H23