Fiscal Federalism and Interjurisdictional Externalities: The case of Air Quality Regulations in Sweden

Résumé

In this paper, we analyze the effects of the interaction of national and local policies to reduce NOx emissions in Sweden, where combustion plants are subject to a heavy national charge and in some cases also subject to individual emission standards set by county authorities. We set up a theoretical model to develop a series of hypotheses regarding the combined effects of such policies on the stringency of the emission standards and on firms' emissions reductions. We make use of actual data to test our hypotheses. Our analytical findings suggest that it is unlikely that local regulators will impose emissions standards stringent enough to achieve further reductions than those induced by the national uniform tax. Such result will hold regardless of the regulatory timing, and it is also observed in our data, where most emissions reductions can be attributed to the national charge and where the effects of the emission standards are insignificant.