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A Method of Designing Energy Tax Rate Based On Game Theory ∗

In this paper, we propose a method of designing energy tax rate based on game theory. Through this method, the effect of energy tax on encouraging manufacturers’ improvement in energy efficiency is enhanced. Consequently policy makers can reduce the average burden of manufacturers brought by energy tax. Through utilizing game theory in a numerical example, we explain the effect of energy tax on encouraging manufacturers to improve their energy efficiency. The result shows that, given a fixed average tax rate, energy tax with differential tax rate according to manufacturers’ energy efficiency is more effective than that with uniform tax rate. Then, based on differential tax rate, a method to determine a proper average tax rate is presented by utilizing theory of Nash equilibrium in game theory. In addition, practicality of the method is simply discussed in the last section.