Abstract

We investigate whether and to what extent uniform and differentiated tax systems diverge in their propensity to create distortionary opportunistic behaviour. The set-up in which we carry out our analysis features polluting firms that are confronted with a Pigovian emission tax. Firms can invest in pollution abatement. We first show that the existence of emission taxes, although optimally chosen, create strategic incentives for firms to distort their abatement investment. Second, we find that a system of differentiated emission taxes has a greater propensity to foster strategic distortions in abatement investment than a uniform emission tax regime.