Environmental policies with consumer-friendly firms and cross-ownership

Abstract

This paper analyzes what environmental policy is implemented by governments when there is cross-ownership between polluting firms that care about social concerns. We compare the equilibrium outcomes under environmental taxes, tradable emission permits and emission standards. We find that the concern of firms about corporate social responsibility (CSR), which is decided endogenously, depends on the environmental policy implemented by the government. The greatest concern is obtained under tradable emission permits and the lowest under emission standards. We also find that cross-ownership between firms affects the CSR level that they choose. Finally, social welfare is at its highest with tradable permits and at its lowest with an emission standard, implying that the government prefers, when possible, to set tradable emission permits rather than the other two policies.