Chapter 1 Introduction 1.1 Research Background
Accompany with rapid economic development, industrialization inevitably deteriorates environment and affects the quality of living and health of people.
Pollution comes not only from local economic activities but also diffuses across border from abroad through winds, rivers, and seawaters. According to the (Canada) Ontario government, about half of the 5,000 premature deaths caused by smog in the province every year can be attributed to air pollution that crosses the Canada-U.S.
border. Toronto's medical health officer, Dr. David McKeown, also complained that the city has a serious air pollution problem, a large part of which is blowing in from across the U.S. border. That pollution is coming from dirty coal-fired plants in the Ohio valley and in the Midwest.1
Observing the increasing problem of pollution, many countries and international organizations begin to pay attention to this environment issue and adopt a variety of environmental policies. Hsu and Tsui (2005) point out that the most frequently used environmental policies are (1) Administrative Regulation, (2) Subsidy, (3) Effluent Charge, (4) Emissions Trading, (5) Environmental Pollution Liability Insurance, and (6) Precautionary Environmental Deposit-Refund Bonding System.2 The common characteristics of those environmental policies are to achieve the goal of polluter-pays-principle (PPP), provide economic incentives, and control pollution emission.
In generally, the key principle of environmental policies in OECD countries is guided by: “those responsible for pollution and those using natural resources should bear the full cost of their actions”, namely the Polluter-Pays-Principle (PPP).3 PPP, developed by the OECD in the 1970s, implies that polluters should pay to cover the
1 Canadian cities petition U.S. to curb air pollution, CBC news, 2006.11.1.
(http://www.cbc.ca/news/canada/canadian-cities-petition-u-s-to-curb-air-pollution-1.589035)
2 The concerned websites, please refer to:
(1) http://air.epa.gov.tw/Stationary/AirFee-index-1.aspx (2) http://www.green99.com.tw/AirWebN/outlay.html
(3) http://wiki.mbalib.com/zh-tw/%E7%8E%AF%E5%A2%83%E6%B1%A1%E6%9F%93%E8%
B4%A3%E4%BB%BB%E4%BF%9D%E9%99%A9 (4) https://srda.sinica.edu.tw/group/sciitem/3/596
3 Source: OECD, 2007, Making Environmental Spending Count.
(http://www.oecd.org/env/outreach/39376495.pdf)
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full costs of any subsequent clean-up without subsidies. PPP can therefore effectively internalize external costs.
Hoel (1991) suggests that international agreements of coordinated reductions of harmful emissions are necessary for solving global environmental problems.
According to U.S. Department of State, the United States and Canada committed a bilateral executive agreement to addressing transboundary air pollution issues in the 1991 Air Quality Agreement (AQA). The AQA established a framework for addressing shared concerns relating to transboundary air pollution and set out objectives for each country to reduce emissions leading to acidic deposition.
After signing AQA, both parties have made excellent progress in reducing emissions of two major pollutants leading to acidic deposition, sulfur dioxide (SO2) and nitrogen oxides (NOX). Since 2000, the parties also have made good progress in reducing emissions of Volatile Organic Compounds (VOCS) and further reducing emissions of NOX, to address ground-level ozone in the border region.4
The performance of AQA is profound. Between 1990 and 2012, emissions of SO2 declined by 58% in Canada and 78% in the United States. The report also provides information on successes in reducing emissions of NOX and volatile organic compounds (VOCS) in the transboundary ozone region. Between 2000 and 2012, Canada’s total NOX emissions in the region decreased by 45 %, while in the United States total NOX emissions in the region declined by 47 % (Fig. 1.1, 1.2, and 1.3).5
4 For more information, see http://www.state.gov/e/oes/eqt/chemicalpollution/83011.htm
5 For more information, see http://www2.epa.gov/sites/production/files/2015-07/documents/2014_
u.s.-canada_progress_report.pdf
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Fig. 1.1 National emissions in the United States and Canada from all sources, 1990-2012
Fig. 1.2 National emissions in the United States and Canada from all sources, 1990-2012
Fig. 1.3 National emissions in the United States and Canada from all sources, 1990-2012
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The efficacy of environmental policies captures many governments’ and international organizations’ attention. What kind of policies can successfully reduce pollution are significant issues for international organizations, governments, and their officials. The 6th Global International Tax Dialogue (ITD) conference,6,7 in the lead up to the COP21 meeting,8 focused on “Tax and the Environment”. There are 300 senior tax and environment policymakers, tax administrators and experts from more than 90 countries met in Paris to identify practical ways of harnessing the power of taxation as an environmental policy tool to help reduce pollution and greenhouse gas emissions.
From the conclusion of the 6th Global ITD conference, taxes are potentially among the most effective ways of cutting pollution and greenhouse gas emissions, but they are currently underused; and even where used, they are frequently designed in a suboptimal way.9
Sweden is another successful case. In 1992, Sweden introduced a high tax on NOX emissions from large combustion sources (e.g. power plants, industrial plants, waste incinerators). In 1980, total emissions of NOX in Sweden amounted to about 450 kilotons. By 2000 they had fallen to just over 240 kilotons. While emissions from transport were reduced by about 13% between 1980 and 1997, emissions from stationary sources were reduced by over 50% on average (Statistics Sweden, 1998, cited in UCD, 2008). Total NOX emissions from all sources decreased by 23% from 1992 to 2000 (Fig. 1.4).10
6 The International Tax Dialogue (ITD) is a joint initiative of the European Commission (EC), Inter-American Development Bank (IDB), International Monetary Fund (IMF), Organization for Economic Co-operation and Development (OECD), World Bank Group and Inter-American Center of Tax Administrations (CIAT). The ITD aims to encourage and facilitate discussion of tax matters among national tax officials, regional tax organizations, international organizations and other key stakeholders. (http://www.oecd.org/ctp/tax-global/international-tax-dialogue.htm)
7 The 6th Global International Tax Dialogue conference,had taken place on 1-3 July, 2015 in Paris, France. For more information, see http://www.itdweb.org/2015conference/
8 The 21st session of the Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC) had taken place in Paris, France, in November 2015.
9 OECD, Much better use can and must be made of taxes to help reduce pollution and greenhouse gas emissions, concluded the participants of the 6th Global International Tax Dialogue conference, 2015.07.03.
(http://www.oecd.org/tax/much-better-use-can-and-must-be-made-of-taxes-to-help-reduce-pollution-an d-greenhouse-gas-emissions.htm)
10 Source: Swedish Environmental Protection Agency (SEPA), 2003, Kväveoxidavgiften – ett effektivt styrmedel. Utvärdering av NO -avgiften (Reducing X NO Emissions. An Evaluation of the X NO X Tax). In Swedish, with an English Summary. Rapport 5335, SEPA, Stockholm, available at www.naturvardsverket.se/Documents/publikationer/620-5335-3.pdf.
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Kennedy (1994) argued that strategic interaction between governments in global markets creates distortion of pollution taxes. This distortion encompasses rent capture effect and pollution-shifting effect. The rent capture effect will lower taxes as each country attempts to gain the competitive advantage over its trading partner and capture foreign rent through net exports. The pollution-shifting effect raises taxes as each country attempts to transfer production and its associated pollution to the other country. If pollution is perfectly transboundary, the pollution-shifting effect may fade out because the shifted pollution will still damage domestic environment.
Technology on reducing pollutant can be spilled over across border in nature.
Every country engages in emission abatement R&D will benefit other countries more or less. One of the spillover paths is through international organizations. Jandhyala and Phene (2015) reveal that internationally oriented nonmarket organizations (for instance, the intergovernmental organization, (IGO)), play supportive roles in supporting cross-border knowledge transfer and innovation among members and by setting up promote a set of similar rules, expectations, and norms across different countries.
1.2 Research Purpose
Assume that there are two countries and each country has a firm producing homogeneous products. Each firm emits pollutant while producing products and eagers to engage in emission abatement R&D. The governments of these two
Fig. 1.4 Emissions of nitrogen oxides in Sweden by sectors (kilotons)
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countries cooperatively levy environmental tax on their domestic firms respectively.
Assume that the domestic pollution may diffuse across border and the emission abatement technology can spill over between the two firms. This paper discusses the following issues:
1. The results of the two firms compete in pollution emission abatement R&D in the non-cooperative R&D and cooperative R&D regimes.
2. In case the technology spillover rate is changed, how the optimal profits of the two firms, domestic and foreign social welfares are affected in both non-cooperative R&D and cooperative R&D regime.
3. If the government changes environmental policy, what are the reaction of the two nations and two firms in both of the non-cooperative R&D and cooperative R&D regimes.
4. Compare the difference between the two R&D regimes.
1.3 Research Contributions
This paper adopts pollution tax as governmental environment policy when facing cross-border pollution and pollution abatement technology with spillovers. It is shown that if the two governments adopt environmental policy, lifting environmental tax under heavy R&D investment burden in both R&D regimes will hurt the outputs and profits of the two firms, but the level of emission abatement is independent to the burden of R&D investment and always increases. In addition, lifting environmental tax will deteriorate domestic social welfare if the pollution damage is relatively small;
and improve foreign social welfare if the pollution damage is intermediate.
This paper also compares the difference between the two R&D regimes. We find that if the spillover rate is relative small (high), the domestic output, profit, emission abatement level, and social welfares in cooperative R&D regime are smaller (greater) than those in non-cooperative R&D regime. But, the price is greater (smaller) in cooperative R&D regime than that in non-cooperative R&D regime. Furthermore, the differences of domestic output, profit, emission abatement level, and social welfare are enlarged, and the difference of market price is shrunk as spillover rate increases.
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1.4 Research Structure
The remaining of this paper is organized as follows: In chapter 2, survey the past literature concerning about the issues of transboundary pollution and international trade, R&D spillovers, and environmental policies. In chapter 3, we firstly create the framework of the model. Then discuss the cases of non-cooperative R&D and cooperative R&D regimes respectively. Finally, compare the difference between the two R&D regimes. Chapter 4 is the conclusion.
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