The Impact of Foreign Emission Tax on Domestic Merger Profitability

This chapter considers a two-country model with oligopolistic interdependence to examine merger incentives arising from environmental policy changes. We consider changes in the emission tax in a foreign country and study how this affects the profitability of a merger in a home country. Results suggest that the effects on merger profitability depend on pollution intensity ratios in the foreign country which is a technology parameter and market power ratios in the home country which is a market structure parameter. Our analysis is relevant to study the effects of environmental policy on merger incentives in a global context.