How pollution taxes may increase pollution and reduce net revenues

This paper develops a positive theory of pollution taxation by a federal au thority when pollution abatement subsidies are used by local governments. E nvironmental and industry lobby groups influence governments with campaign contributions. First, pollution may increase in the pollution tax because t he abatement subsidy increases (decreases) with the tax, and pollution incr eases (decreases) in the abatement subsidy. This occurs because the lobbyin g incentives change at a pollution tax reform. Second, pollution taxes may reduce net revenues because subsidy expenditures rise. Third, pollution may increase simultaneously as net revenues fall. Finally, the welfare effect of a pollution tax may be negative.