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. We find that the decision of governments on whether to establish a tax or not depends on three factors: the degree of environmental concern of the firms, the R&D knowledge disclosed by them and whether governments cooperate in setting taxes. When countries do not cooperate and firms do not share their knowledge both countries set emissions taxes for low levels of the concern, while neither firm sets taxes if the concern is sufficiently high. If countries cooperate, they want to implement taxes for higher values of the concern. Under full information disclosure, when countries do not cooperate an asymmetric equilibrium arises: only one country implements a tax for intermediate values of the concern. However, when countries cooperate they levy taxes for all the values of concern. Thus, cooperation encourages governments to implement environmental policies.