The Interplay between Profit and Environmental Taxation: Incentives to Create RJVs for Green Innovations

We consider the joint effect of profit and emission taxation in a model of imperfect competition with environmental externalities. We show that, when both profit taxation and emission taxation are used, the former is no longer neutral. The two fiscal tools are substitutes, and for any profit taxation rate there exists a unique optimal environmental tax rate that entails the first best outcome as an equilibrium. Our analysis therefore suggests that policy makers in charge of different taxation policies should coordinate in order to optimally design the tax menu for firms. Conversely, profit taxation has no consequences on firms’ green R&D efforts for the attainment of abatement technologies. In this regard, we also show that independent R&D projects accompanied by information sharing (i.e., technological spillovers) outperform a joint venture when a green innovation is at stake.