Environmentally conscious consumers and voluntary tax agreements: A case of dissonance

We consider voluntary agreements (VAs) in which a firm agrees to an abatement level, expecting mild emissions tax rate in return. VAs are credible if the regulator offers a time-consistent menu relating emissions tax rates to abatement, and the firm chooses its abatement and tax rate from this menu. This VA type can be problematic when consumers are environmentally conscious. As consumers’ social responsibility (SR) increases, the regulator demands a lower tax rate independent of the firm’s abatement efforts: the regulator has little to offer regarding tax-rate reductions even at moderate SR levels. Credible VAs are typically considered superior to mandatory taxation; however, for sufficiently high SR levels, mandatory taxation is superior in terms of environmental protection and welfare. • Time-consistent Voluntary Agreements (VA) imply that promises are always honored. • Socially Responsible (SR) consumers recognize part of the externality they create. • Medium SR levels lead to higher abatement under Mandatory Taxation than under VA. • Intermediate SR levels reduce social welfare under VA compared with Mandatory Taxation.