Optimizing carbon taxation target and level: Enterprises, consumers, or both?

Excessive emissions of greenhouse gases have greatly undermined the sustainability of environment and economy. Carbon tax has proven to be an effective means to control emission and mitigate its negative impacts. This paper addresses the issue of optimal taxation target from the government’s perspective. Three schemes of carbon tax are considered in a Stackelberg game setting: production-only, consumer-only and mixed-type, where the government leads to determine the taxation rate, and an enterprise follows to optimize its production level and emission reduction. Closed-form analytical solutions are obtained in each case with a numerical study to get additional insights. The paper founds that government’s optimal decision on the taxation target depends on the magnitude of environmental impact of carbon emission. It may also vary with the performance metric to be achieved: maximizing social welfare as the government’s objective, maximizing profit as the enterprise’ objective, or minimizing the amount of carbon emission as social benefit. Our model and methods offer an analytical approach to provide informed decision support for policy makers regarding optimal carbon taxation target and level.