CAPITAL ACCUMULATION OF A FIRM FACING AN EMISSIONS TAX

In this paper we consider the dynamic behavior of a firm that is subje ct to environmental regulation. It is assumed that, in order to preven t firms from polluting the environment excessively, the government imp oses an emissions tax. We determine how an emissions tax influences th e firm's decisions concerning investments and abatement efforts. In th e model we incorporate the realistic property that a given abatement e xpenditure leads to more pollution reduction when pollution is large. This property implies increasing returns to scale with respect to poll ution reduction. It turns out that, together with the ''usual'' assump tion of decreasing returns to scale with respect to production, this p roperty leads to the occurrence of history-dependent equilibria in cas e the pollution tax rate is sufficiently large. It is possible to deri ve an explicit formula for the threshold tax rate above which these hi story-dependent equilibria can occur. We show that an investment grant by the government can influence the firm so as to approach the equili brium with a higher capital stock. Finally, we compare our results wit h those of a related model where the firm faces a strict pollution sta ndard rather than an emissions tax. Among other things, we show that g rowth is more suppressed under a tax than under a standard when the fi rm is small.