Environmental Tax and Macroeconomic Dynamics under Vertical Production Structure
-
Pengqing Zhang
and
Jiancai Pi
Abstract
Both upstream and downstream sectors can generate pollution, but such a vertical production structure has seldom been studied. This paper embeds upstream and downstream linkages into the environmental dynamic general equilibrium model, and explores both aggregate and sectoral effects of the environmental tax on macroeconomic dynamics. We find that: (i) the environmental tax designed for a 20 % reduction in emissions in the economy with upstream and downstream linkages is lower than that without the linkages; (ii) taxing only the upstream sector is more efficient for a moderate environmental tax rate than taxing both sectors, but to achieve a 20 % reduction goal, it will double abatement costs and reduce social welfare; (iii) there is an inverted U-shape implication of the environmental tax on output with respect to the degree of upstream and downstream linkages.
Funding source: Guangdong Planning Office of Philosophy and Social Science
Award Identifier / Grant number: GD22YLJ01
Funding source: Guangdong University of Foreign Studies
Award Identifier / Grant number: 2022RC076
Acknowledgments
We thank the Editor and an anonymous referee for helpful comments. This research is supported by Guangdong Planning Office of Philosophy and Social Science (GD22YLJ01), and Guangdong University of Foreign Studies (2022RC076). The usual disclaimer applies.
References
Angelopoulos, K., G. Economides, and A. Philippopoulos. 2010. What Is the Best Environmental Policy? Taxes, Permits and Rules under Economic and Environmental Uncertainty. CESifo Working Paper series 2980. CESifo Group Munich.10.2139/ssrn.1571058Search in Google Scholar
Angelopoulos, K., G. Economides, and A. Philippopoulos. 2013. “First- and Second-Best Allocations under Economic and Environmental Uncertainty.” International Tax and Public Finance 20: 360–80. https://doi.org/10.1007/s10797-012-9234-z.Search in Google Scholar
Annicchiarico, B., S. Carattini, C. Fischer, and G. Heutel. 2021. Business Cycles and Environmental Policy: Literature Review and Policy Implications. NBER Working Paper No. w29032.10.3386/w29032Search in Google Scholar
Annicchiarico, B., and F. Di Dio. 2015. “Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model.” Journal of Environmental Economics and Management 69: 1–21. https://doi.org/10.1016/j.jeem.2014.10.002.Search in Google Scholar
Annicchiarico, B., and F. Di Dio. 2017. “GHG Emissions Control and Monetary Policy.” Environemtal and Resource Economics 67 (4): 823–51. https://doi.org/10.1007/s10640-016-0007-5.Search in Google Scholar
Annicchiarico, B., and F. Diluiso. 2019. “International Transmission of the Business Cycle and Environmental Policy.” Resource and Energy Economics 58: 101112. https://doi.org/10.1016/j.reseneeco.2019.07.006.Search in Google Scholar
Balke, N. S., and S. P. Brown. 2018. “Oil Supply Shocks and the US Economy: An Estimated DSGE Model.” Energy Policy 116: 357–72. https://doi.org/10.1016/j.enpol.2018.02.027.Search in Google Scholar
Beladi, H., and R. Frasca. 1999. “Pollution Control under an Urban Binding Minimum Wage.” The Annals of Regional Science 3 (4): 523–33. https://doi.org/10.1007/s001680050119.Search in Google Scholar
Bolton, P., and M. Whinston. 1993. “Incomplete Contracts, Vertical Integration and Supply Assurance.” The Review of Economic Studies 60 (1): 121–48. https://doi.org/10.2307/2297815.Search in Google Scholar
Bonanno, G., and J. Vickers. 1988. “Vertical Separation.” The Journal of Industrial Economics 36 (3): 257–65. https://doi.org/10.2307/2098466.Search in Google Scholar
Bosetti, V., and M. Maffezzoli. 2014. “Occasionally Binding Emission Caps and Real Business Cycles.” IGIER Working Paper, 523.Search in Google Scholar
Calvo, G. 1983. “Staggered Prices in a Utility-Maximizing Framework.” Journal of Monetary Economics 12 (3): 383–98. https://doi.org/10.1016/0304-3932(83)90060-0.Search in Google Scholar
Copeland, B. R., and M. S. Taylor. 1999. “Trade, Spatial Separation, and the Environment.” Journal of International Economics 47 (1): 137–68. https://doi.org/10.1016/s0022-1996(98)00020-8.Search in Google Scholar
Dissou, Y., and L. Karnizova. 2016. “Emissions Cap or Emissions Tax? A Multi-Sector Business Cycle Analysis.” Journal of Environmental Economics and Management 79: 169–88. https://doi.org/10.1016/j.jeem.2016.05.002.Search in Google Scholar
Fischer, C., and G. Heutel. 2013. “Environmental Macroeconomics: Environmental Policy, Business Cycles, and Directed Technical Change.” Annual Review of Resource Economics 5: 197–210. https://doi.org/10.1146/annurev-resource-091912-151819.Search in Google Scholar
Fischer, C., and M. Springborn. 2011. “Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes.” Journal of Environmental Economics and Management 62 (3): 352–66. https://doi.org/10.1016/j.jeem.2011.04.005.Search in Google Scholar
Ganelli, G., and J. Tervala. 2011. “International Transmission of Environmental Policy: A New Keynesian Perspective.” Ecological Economics 70 (11): 2070–82. https://doi.org/10.1016/j.ecolecon.2011.06.005.Search in Google Scholar
Gaudet, G., and N. V. Long. 1996. “Vertical Integration, Foreclosure and Profits in the Presence of Double Marginalization.” Journal of Economics and Management Strategy 5 (3): 409–32.10.1111/j.1430-9134.1996.00409.xSearch in Google Scholar
Greaker, M., and K. E. Rosendahl. 2008. “Environmental Policy with Upstream Pollution Abatement Technology Firms.” Journal of Environmental Economics and Management 56 (3): 246–59. https://doi.org/10.1016/j.jeem.2008.04.001.Search in Google Scholar
Hafstead, M. A., and R. C. WilliamsIII. 2018. “Unemployment and Environmental Regulation in General Equilibrium.” Journal of Public Economics 160: 50–65. https://doi.org/10.1016/j.jpubeco.2018.01.013.Search in Google Scholar
Hart, O., J. Tirole, D. W. Carlton, and O. E. Williamson. 1990. “Vertical Integration and Market Foreclosure.” Brookings Papers on Economic Activity Special Issue. 205–86. https://doi.org/10.2307/2534783.Search in Google Scholar
Heutel, G. 2012. “How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks.” Review of Economic Dynamics 15 (2): 244–64. https://doi.org/10.1016/j.red.2011.05.002.Search in Google Scholar
Huppes, G., A. de Koning, S. Suh, R. Heijungs, L. van Oers, P. Nielsen, and J. B. Guinée. 2006. “Environmental Impacts of Consumption in the European Union: High-Resolution Input-Output Tables with Detailed Environmental Extensions.” Journal of Industrial Ecology 10 (3): 129–46. https://doi.org/10.1162/jiec.2006.10.3.129.Search in Google Scholar
Hyun, H.-J., and J. Hur. 2014. “Trade Openness and Vertical Structure: Evidence from Korean Firm-Level Data.” Open Economies Review 25: 701–20. https://doi.org/10.1007/s11079-013-9291-7.Search in Google Scholar
Khan, H., K. Metaxoglou, C. R. Knittel, and M. Papineau. 2019. “Carbon Emissions and Business Cycles.” Journal of Macroeconomics 60: 1–19. https://doi.org/10.1016/j.jmacro.2019.01.005.Search in Google Scholar
Mazzanti, M., G. Marin, S. Mancinelli, and F. Nicolli. 2015. “Carbon Dioxide Reducing Environmental Innovations, Sector Upstream/Downstream Integration and Policy: Evidence from the EU.” Empirica 42: 709–35. https://doi.org/10.1007/s10663-014-9273-z.Search in Google Scholar
Metcalf, G. E., and D. Weisbach. 2009. “The Design of Carbon Tax.” Harvard Environmental Law Review 33 (2): 499–556.10.2139/ssrn.1324854Search in Google Scholar
Nordhaus, W. 2008. A Question of Balance: Weighing the Options on Global Warming Policies. New Haven, CT: Yale University Press.10.2307/j.ctt1npzkhSearch in Google Scholar
Oladi, R., and H. Beladi. 2015. “On Foreign Aid, Pollution and Abatement.” Environment and Development Economics 20 (6): 797–812. https://doi.org/10.1017/s1355770x15000066.Search in Google Scholar
Ordover, J. A., G. Saloner, and S. Salop. 1990. “Equilibrium Vertical Foreclosure.” The American Economic Review 80 (1): 127–42.Search in Google Scholar
Pepall, L., and G. Norman. 2001. “Product Differentiation and Upstream-Downstream Relations.” Journal of Economics and Management Strategy 10 (2): 201–33. https://doi.org/10.1111/j.1430-9134.2001.00201.x.Search in Google Scholar
Pi, J., and P. Zhang. 2017. “Foreign Capital, Pollution Control, and Wage Inequality in Developing Countries.” International Review of Economics & Finance 48: 280–8. https://doi.org/10.1016/j.iref.2016.11.007.Search in Google Scholar
Salinger, M. 1988. “Vertical Mergers and Market Foreclosure.” Quarterly Journal of Economics 103 (2): 345–56. https://doi.org/10.2307/1885117.Search in Google Scholar
Shi, K., and J. Xu. 2007. “Optimal Monetary Policy with Vertical Production and Trade.” Review of International Economics 15 (3): 514–37. https://doi.org/10.1111/j.1467-9396.2007.00688.x.Search in Google Scholar
Tawada, M., and S. Sun. 2010. “Urban Pollution, Unemployment and National Welfare in a Dualistic Economy.” Review of Development Economics 14 (2): 311–22. https://doi.org/10.1111/j.1467-9361.2010.00554.x.Search in Google Scholar
Tomiura, E. 2003. “Changing Economic Geography and Vertical Linkages in Japan.” Journal of the Japanese and International Economies 17 (4): 561–81. https://doi.org/10.1016/s0889-1583(03)00063-7.Search in Google Scholar
Supplementary Material
This article contains supplementary material (https://doi.org/10.1515/snde-2024-0009).
© 2025 Walter de Gruyter GmbH, Berlin/Boston
