International Review of Environmental and Resource Economics > Vol 13 > Issue 3-4

Optimal Taxation, Environment Quality, Socially Responsible Firms and Investors

Thomas I. Renström, Durham University Business School, UK, Luca Spataro, Dipartimento di Economia e Management, University of Pisa, Italy, Laura Marsiliani, Durham University Business School, UK,
Suggested Citation
Thomas I. Renström, Luca Spataro and Laura Marsiliani (2019), "Optimal Taxation, Environment Quality, Socially Responsible Firms and Investors", International Review of Environmental and Resource Economics: Vol. 13: No. 3-4, pp 339-373.

Publication Date: 18 Sep 2019
© 2019 T. I. Renström, L. Spataro and L. Marsiliani
Asset pricing: Equity risk premium,  Corporate finance: Investment policy,  Financial markets: Portfolio theory,  Environmental Economics: Market-based Policy Instruments,  Public Economics: Internal Taxation,  Public Economics: Public Goods,  Climate Change
JEL Codes: D21D53G11H21H23M14Q58
Socially responsible investmentcorporate social responsibilityenvironmental qualityoptimal taxationpollution


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In this article:
1. Introduction 
2. The Model Setup 
3. The Ramsey Problem 
4. Discussion of the Results 
5. The Role of the Warm-Glow in the First-Best Allocation 
6. Conclusions 
Appendix A.1. The Implementability Constraint 
Appendix A.2. Proof of Lemma 1 
Appendix A.3. Proof of Proposition 2 
Appendix A.4 


We characterize the optimal pollution-, capital- and labour-tax structure in a continuous-time model in the presence of pollution (resulting from production), both in the first- and second-best, allowing investors to be driven by social responsibility objectives. The social responsibility objective takes the form of warm-glow, as in Andreoni (1990) and Dam (2011), inducing firms to reduce pollution through increased abatement activity. Among the results, the second-best pollution tax displays an additivity property and the Chamley–Judd zero capital-income tax can be violated under warm-glow preferences. We also show that first- and second-best pollution taxes are positive, under warm-glow preferences, and, under mild assumptions, the latter yield lower first-best pollution taxes and lower pollution intensity.