Mechanism Design Of Emission Tax Based On Dynamic Game Theory

In facing the dual increasing pressures of control of polluting emissions and greenhouse gas emissions (GHG), it has an important practical significance for China to seek market-based incentive emissions abatement policies and their implementing mechanisms which are suitable for our national conditions and helpful to improve emissions abatement effectiveness and efficiency and promote the sustainable development of our country. As being a large developing country, taxing emissions is one of main choices for China to control the mentioned emissions and its implementation depends on the environmental effectiveness, cost-effectiveness, meets distributional considerations, and institutional feasibility which are closely to specific implementation schemes. In this dissertation, firstly, we apply environmental economics, game theory, and operations research methods to analysis and modeling the main players participating in the tax policy implementation process and focus on the designs of emissions tax and its abatement implementation schemes which are implemented in an imperfect competition and asymmetric market environment with exogenous abatement targets form a emitter perspective by employing dynamic game models. The outline is as follows:(1) Concerning as different tax rates having a significant impact on the distributions of emissions abatement, the abatement costs among the firms with various technologies, we employing a two-stage dynamic game model to investigate the distributive effects of different emissions tax rates. A numerical Simulation is taken to two firms representing the Chinese western and eastern steel and iron industry employing a duopoly Cournot model based on a presumption that a carbon tax is implemented to control CO2emissions.(2) Output subsidy rebating scheme and market share rebating scheme are examined which aims are to mitigate the adverse effects on firms’competitiveness born from the implement of emission tax. Firstly, we take an assumption that the revenues fully rebated to answer how to choose the refunding biases between output subsidy and market share. A numerical Simulation is taken to two firms representing the Chinese western and eastern steel and iron industry employing a duopoly Cournot model based on a presumption that a carbon tax is implemented to control CO2emissions. The refunding biases are chosen based on an impact of the two output-based refunding scheme on distribution of abatement tasks, the industry total output, the abatement costs, the changes of firms’ market shares, and the socio-economic welfare.(3) Another aspect of taxes refunding scheme is about the ratio of the total revenues rebated to firms. We investigate two taxes refunding schemes based on output to answer the above the problem in an imperfect competition and asymmetric market environment. The first one is about polluting emissions and the other is about GHG emissions. Further studies of the two schemes are taken by specifying the forms of abatement cost functions, the market demand functions, and the damage functions employing a duopoly Cournot model.(4) Compensating scheme is required to meet distributional considerations, especially to firms with different technologies located in different regions. We proposal an compensating scheme based on a two-stage dynamic game model taking a form of transferring transfer payments from the total revenues. Further studies of the two schemes are taken by specifying the forms of abatement cost functions, the market demand functions, and the damage functions employing a duopoly Cournot model.(5) Another compensating scheme is investigated to meet distributional considerations of different regions at different development stages. We investigate the compensation scheme based on a three-stage dynamic game model by taking the regional governments into considerations. Further studies of the two schemes are taken by specifying the forms of abatement cost functions, the market demand functions, and the damage functions employing a duopoly Cournot model.From the above studies, we get the main conclusions as follows:(1) The distributive effects of different tax rates are some different. For carbon dioxide emissions abatement, abated emissions relatively occur to the firm with lower abatement costs in both two tax rates, and in the differentiated tax rate mode, the distributive effects are strengthened which makes the firm with lower abatement costs take more shares of abated emissions and bear more abatement costs given the emissions reduction targets. The market shares of firms with more advanced technologies are increased in both two of tax rates, but in the differentiated tax rate, the market shares of firms with more advanced technologies are enhanced more..(2) The abatement effects are a little different between two output-based refunding bias of taxes. The industry total output, emissions levels, social abatement costs and socio-economic welfare level are higher under the refunding scheme based on output subsidy. On the other hand, the refunding scheme based on market shares is more conducive to enhance the competitiveness of firms with advanced technologies.(3) The emissions attributes influence the rebating proportion. Firstly, for ordinary polluting emissions, the output subsidy refunding scheme can achieve a first-best outcome by setting a uniform emissions tax and differential output subsidies. The optimal rebating proportion to firms depends on the relative size of output under-provision distortion born of imperfect competition and emission environmental externality. When emissions environmental externality is worse than the externality born of imperfect competition, the government’s emissions taxes budget constraint is binding and the optimal rebated proportion increases with marginal damage from emissions. Given the externality born of imperfect competition, the smaller marginal damage created requires a lower optimal emissions tax and its revenues. It is beneficial to increase the optimal rebated proportion to mitigate the externality born of imperfect competition and increase the economic welfare. However, when the marginal damage from emissions is too small to correct an under-provision output distortion resulting from imperfect competition by fully refunding tax revenues, the refunding scheme fails and needs other mechanisms to overcome this output distortion. Conversely, if emission marginal damage is serious, firms should be accountable for the damage caused by their emissions and the optimal rebated proportion should be reduced and the share of tax revenues compensating consumers should be raised.Secondly, for GHG emissions, the output subsidy refunding scheme can achieve the second-best outcomes by setting a uniform emissions tax and output subsidies based on achieving an exogenous abatement target. We further examine the refunding scheme by employing a double Cournot model. The GHG emissions tax increases with abatement difficulties and the exogenous abatement targets,and the economic welfare decreases with exogenous abatement targets. The rebating proportion is always larger than the one that implies that the required funds for maximizing economic welfare exceed the total GHG emissions tax revenues, and the government’s emissions taxes budget constraint is not binding. Therefore, for global externality emissions such as GHG emissions, controlling firms’ emissions requires a mandatory emission abatement target, but the abatement activities will cause a short-term and local welfare loss. When the externality born of imperfect competition is large, the funds used to correct output under-provision distortion may exceed the total emissions tax revenues.(4) The conclusions of two compensating mechanisms which are designed based on rebated total taxes to meet distributive considerations of underdeveloped areas are quite similar, whether compensate firms or local governments for undertaking more abatement emissions and bearing more abatement costs. The proportion of taxes used as compensation increase with the exogenous emissions abatement targets and the coefficient of abatement cost functions of which firms are located in underdeveloped areas. However, the proportion decreases with the coefficient of abatement cost functions of which firms are located in developed areas.(5) In the design of tax abatement policies, we should take the issues such as enhancing the cost-effectiveness, environment effects and political feasibility into consideration, as well as the issues that meet distributive effects of mitigation policies. The effects on emitters of emissions tax should be given full consideration in the emissions tax design.