The political economy of emission tax design in environmental policy

In actual environmental policy, the design of actual pollution emission taxes differs significantly with the optimal Pigovian tax. In particular, earmarking prevails and actual taxes are usually combined with regulation. Furthermore tax rates are generally too low to significantly influence polluters' behavior. The paper develops a political economy model to explain these design parameters: the tax rate, earmarking pattern and whether the tax is combined with a regulation. An incumbent government selects these parameters under the influence of a green and a polluters' lobby groups. An earmarked tax is introduced in equilibrium which rate is lower than the regulatory shadow price when the status quo regulation is imperfectly enforced and if the green lobby is sufficiently weak.