Efficient Environmental Standards with Imperfect Completion

19 Pages Posted: 13 Jan 2014

See all articles by Jeffrey D. Petchey

Jeffrey D. Petchey

Curtin University - Centre for Research in Applied Economics

Date Written: May 1, 2012


Economists have been concerned that sovereign communities may distort environmental policies to attract mobile capital. This paper provides something of a challenge to this idea. It does so by extending the model of Oates and Schwab (1988) to allow the supply of capital to a state, whether acting independently or strategically as part of a federation, to be less than perfectly elastic due to capital market imperfections. This gives the state an incentive to distort its policies in order to manipulate its domestic capital price relative to the given world return for capital. The key result is to show that the state always prefers to use a dedicated capital tax to achieve its desired domestic price, leaving environmental standards at efficient levels. Only when the state is denied access to a capital tax will it resort to distorting environmental standards. Thus, distortions to environmental standards arise from restrictions on the set of policy instruments rather than non-cooperative behavior or capital mobility per se, at least when the incentive to distort policy arises from capital market imperfections.

Keywords: Emissions, environmental standards, taxes, mobile capital, race to the bottom.

JEL Classification: H21, H23, H73, H77.

Suggested Citation

Petchey, Jeffrey D., Efficient Environmental Standards with Imperfect Completion (May 1, 2012). CRAE Research Paper No. 01032013. Available at SSRN: https://ssrn.com/abstract=2378092 or http://dx.doi.org/10.2139/ssrn.2378092

Jeffrey D. Petchey (Contact Author)

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845

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