Carbon tax/subsidy policy choice and its effects in the presence of interest groups

Interest groups, such as industry organization, public finance and environmental group, may exert influences on policy makers when they are choosing environmental policies. Considering the situation that two countries, where a domestic country suffers equal influence and a foreign country suffers different influences from these groups, can choose carbon tax policy or carbon subsidy policy. Then this paper constructs a two-staged game model to study how interest groups make differences to environmental policy choices, and their impacts on policy level, production (carbon emission), profit and welfare between countries. Results show that the domestic country will definitely choose carbon tax policy, but the foreign country may make different choices. Furthermore, if the foreign country chooses carbon subsidy policy, the domestic country will set higher tax rate than the foreign country does, but production (carbon emission), profit and welfare of the domestic country will be lower than those of the foreign country. If the foreign country chooses carbon tax policy, carbon tax rate, production (carbon emission), profit and welfare are ambiguous between countries.