ENVIRONMENTAL POLICY AND INTERJURISDICTIONAL COMPETITION

Laura Marsiliani
Thomas I. Renström
Cees Withagen

A common result in models of tax competition is that environmental quality is enhanced if jurisdictions cooperate over environmental policy. This paper challenges the standard view by showing that in a two-period model of tax competition, where saving behaviour is taken into account and distortionary taxes are present (second-best world), interjurisdictional competition may be desirable. Our analysis suggest that environmental policy may be stricter when jurisdictions are left free to compete over taxes on capital and pollution..

Keywords: Environmental policy, tax competition, distortionary taxation, savings.

JEL classification: H2, H7.

Correspondence to:
L. Marsiliani, Department of Economics and Finance, University of Durham, 23-26 Old Elvet, Durham, DH1 3HY, UK.
Tel: +44-(0)191-334 6363. Fax: +44-(0)191-334 6341.
Email: [email protected] Web: http://www.dur.ac.uk/laura.marsiliani/

T.I. Renström, Department of Economics and Finance, University of Durham, 23-26 Old Elvet, Durham, DH1 3HY, UK.
Tel: +44-(0)191-334 6369. Fax: +44-(0)191-334 6341.
Email: [email protected] Web: http://www.dur.ac.uk/t.i.renstrom/

C. Withagen, CentER for Economic Research, Tilburg University, P.O. Box 90153, 5000 LE Tilbrug, The Netherlands.
Tel: +31-13-466 2628. Fax: +31-13-466 3042.
Email: [email protected] Web:http://center.uvt.nl/staff/withagen/

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