Environmental taxation, tax competition, and harmonization

Helmuth Cremer, Firouz Gahvari

Research output: Contribution to journalArticlepeer-review


This paper studies the tax competition problem in the presence of transboundary pollution. It shows that economic integration causes the firms to adopt the same or less polluting technologies, but it nevertheless increases aggregate emissions and lowers welfare. Second, the paper examines the ramifications of partial tax harmonization policies. It shows that harmonizing commodity taxes above their unrestricted Nash equilibrium value may either increase or lower the equilibrium emission tax. Under the former, firms opt for less polluting technologies, aggregate emissions decrease and welfare improves. On the other hand, if emission tax goes down, firms will choose more polluting technologies, aggregate emissions will increase and welfare deteriorates. Finally, harmonizing the emission tax above its unrestricted Nash equilibrium value, which leads the firms to adopt a less polluting technology, also causes aggregate emissions to decline and overall welfare to increase.

Original languageEnglish (US)
Pages (from-to)21-45
Number of pages25
JournalJournal of Urban Economics
Issue number1
StatePublished - Jan 2004


  • Emissions
  • Environmental taxation
  • Partial harmonization
  • Polluting technology
  • Tax competition

ASJC Scopus subject areas

  • Economics and Econometrics
  • Urban Studies


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