Bankruptcy Risk and Imperfectly Enforced Emissions Taxes

Abstract

Under favorable but reasonable conditions, an imperfectly enforced emissions tax produces the efficient allocation of individual emissions control; aggregate emissions are independent of whether enforcement of the tax is sufficient to induce the full compliance of firms, and differences in individual violations are independent of firm-level differences. All of these desirable characteristics disappear when some firms under an emissions tax risk bankruptcy - the allocation of emissions control is inefficient, imperfect enforcement causes higher aggregate emissions, and financially insecure firms choose higher violations.

Keywords: Bankruptcy, Emissions Taxes, Limited Liability

JEL Classification: L51, Q28, Q58