The impact of environmental tax revenue allocation on the consequence of lobbying activities

This paper investigates how a tax revenue allocation rule determines the level of environmental taxation influenced by interest groups. A model of special interest politics is modified to incorporate environmental taxation. Two groups of agents exist. The first group earns wage income, has negative utility derived from pollution generated by energy consumption, and earns a profit share of the energy industry. The second group earns wages and has negative utility from pollution, but does not own shares. The government imposes an ad-valorem pollution tax and spends a proportion of its revenue as compensation for the tax burden on the first group and the remainder on public abatement. Two regimes are considered. First, a resource-rent group lobbies the government to protect its income source. Second, an environmentally conscious group lobbies the government to spend the revenue for pollution reduction. The critical proportion of transfer to tax revenue is derived to achieve the socially optimal rate of environmental taxation, even when the tax rate is subject to the influence of interest groups.