Abstract

We consider firms that combine variable inputs and capital goods that embody different technologies. Input use may cause simultaneously flow and stock externalities (e.g., air pollution/ climate change). Regulatory bodies tend to respond to this challenge by developing separate policies for each externality but do not recognize that many externalities are interrelated. Based on a two-phase optimization approach formulated in the context of CO2 emissions, the paper determines the socially optimal coordinated taxation scheme. It also demonstrates that the presence of one externality magnifies the efficiency losses of the other. Therefore, non-coordinated taxation of the two externalities leads to over taxation. The analysis also defines the socially optimal taxation scheme of a second externality when the regulation/taxation of the first externality is unalterable. If the CO2 emissions for a given unit of input depend on the employed technology, optimal policies require technology-differentiated tax schemes. Improving the precision of the CO2 footprint of the variable inputs as a function of the employed technology not only helps to improve the implementation of a technology differentiated taxation scheme but most likely also the perception of social justice and consequently public acceptance of carbon taxes. A numerical example based on data from the literature illustrates that the difference of coordinated and non-coordinated taxes is in the range of 9 – 12%.

Keywords: Multiple pollutants; multiple regulators, two-phase optimization; climate change; air-29 pollution, co-benefits 30

JEL classification: C61; H70; Q53; Q54

Co-authors : Angels Xabadia, David Zilberman

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