Environmental Taxes When Firms Care About Environmental Corporate Social Responsibility

Abstract

This paper studies the incentive by governments to implement emissions taxes when firms are environmentally friendly and sell their products on a single world market. Firms choose their R&D non-cooperatively and governments can pre-commit to an emissions tax. We find that the decision of governments on whether to establish a tax or not depends on the degree of environmental responsibility of the firms and the R&D knowledge disclosed by them. When firms do not share their technological knowledge, in equilibrium, both countries set emissions taxes for low levels of environmental concern by firms, while neither sets taxes if the concern is sufficiently high. Under full information disclosure, we find that both countries set emissions taxes if the concern is sufficiently low, only one country implements a tax for intermediate values, and none of them sets taxes if the concern is sufficiently high. Which of the two cases considered is the one that most encourages the adoption of environmental policies by governments depends on how concerned firms are about ECSR. Finally, if countries cooperate in setting environmental taxes, both countries set them for a wider range of environmental concern values of firms than when countries do not cooperate. Therefore, cooperation between countries is a factor that encourages governments to implement environmental policies.

Keywords: Emission tax, environmental corporate social responsibility, international trade, R&D competition, Research Joint Venture.