Taxation of a Polluting Non-renewable Resource in the Heterogeneous World

Abstract

This paper extends the literature on the taxation of polluting exhaustible resources by taking international heterogeneities and national tax-setting into account. We propose a two-country Romer model of endogenous growth in which the South is endowed with the stock of an essential polluting non-renewable resource and world economic growth is driven by a northern research sector. We consider the stock of pollution as affecting global welfare. First, we characterize the optimal environmental taxation policies. Second, we examine the impacts of national taxes. Their time profile determines the extraction path, the dynamics of pollution accumulation and that of world output. Their respective levels entail inter-country interactions by altering the efficiency of the world resource allocation, the tax revenues and the resource rents. We study isolatedly the distortional and distributional effects of local taxes. Then, we completely assess their overall impacts, shedding light on the divergent interests of heterogeneous regions regarding their national environmental taxes.