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, t.i.renstrom@durham.ac.uk Luca Spataro, Dipartimento di Economia e Management, University of Pisa, Italy, luca.spataro@unipi.it Laura Marsiliani, Durham University Business School, UK, laura.marsiliani@durham.ac.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. http://dx.doi.org/10.1561/101.00000112

Published: 18 Sep 2019
© 2019 T. I. Renström, L. Spataro and L. Marsiliani
 
Subjects
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
 
Keywords
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
Acknowledgements
References

Abstract

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.

DOI:10.1561/101.00000112