The Superiority of Environmental Federalism in the Presence of Lobbying and Prior Tax Distortions


  •  I am grateful to editor Professor John P. Conley, an associate editor, and two anonymous referees for valuable comments and suggestions. Thanks also to Yasushi Iwamoto, Tsung-Sheng Tsai, and Kuo-chih Yuan for helpful comments and discussions. The remaining errors are the author’s sole responsibility. Financial support from the National Science Council (Grant NSC 98-2410-H-004-043-MY2) and National Chengchi University is gratefully acknowledged.

Yu-Bong Lai, Department of Public Finance, National Chengchi University, 64, Sector 2, ZhiNan Road, Taipei 11605, Taiwan, R.O.C (


It is generally believed that environmental federalism tends to generate greater pollution emissions than centralized policymaking. This paper demonstrates that the opposite can occur in the presence of lobbying. Although the decentralized regime gives rise to a tax-interaction effect, which induces policymakers to set lax environmental policies, it may also reduce the political pressure on enlarging allowed emissions. If the latter outweighs the former, then the decentralized regime will generate less pollution than the centralized regime. Moreover, we also show that the decentralized regime can be more efficient than the centralized regime, which provides an alternative theoretical support for the superiority of environmental federalism.