Tax Policy, Environmental Concern and Level of Emission Reduction

Regulators often use environmental policy to induce green initiatives by firms. This paper examines the emission-reduction-inducement effect of the environmental tax deduction (ETD) incentive by Stackelberg game models between an environmental regulator and a profit-maximizing monopolistic firm facing emission-dependent demand. Different cases, i.e., with/without considering the regulator's environmental concerns, were used to investigate the ETD policy effects with a numerical example. This paper shows that the regulator's tax policy will only affect the emission reduction level, but cannot influence the output, which combined with the firm's operation factors mainly depends the consumers' attitude toward green products and price sensitivity. Numerical simulation results showed that for the cases with a moderate level of environmental concern and emission standard, the regulator can set an ETD incentive to motivate the choice of a higher level of emission reduction and simultaneously increase social welfare; otherwise, the increase in environmental quality is at the expense of social welfare. When the market's environmental consciousness increases, it is easier for the regulator to guide the firm to adopt an ETD solution. Therefore, improving consumers' awareness of environmental protection is an effective way to promote green investment of firms.