Environmental policy instruments and ownership of firms

Abstract

We assume an economy comprising two countries, with one polluting firm located in each country and transboundary spillovers. Each government may implement an environmental tax or an emission standard to control pollutant emissions. Investors from each country own a percentage of the stock in their local firm and in the firm located abroad. We find that the ownership structure of firms that compete in international markets affects the design of environmental policies by governments. In equilibrium, governments implement emission standards if the stake held by domestic investors in the firm located abroad is small enough. When that stake is intermediate in size and transboundary spillovers are high enough, identical governments choose different environmental policies. Finally, when the stake is large enough both governments implement environmental taxes.