Considering the problems and diseases caused by the pollution, due to industrial centers in cities, the government must consider solutions, such as imposing a tax on pollutants. Green tax is considered one of the most effective tools of financial policies through which the local policymakers can direct the economic and social activities to sustainable development. A green tax rate is an environmental fee charged to companies for emitting pollution. This type of tax has an obvious role in controlling polluting industries and thus determining their environmental performance in the city. However, in the polluted cities of the country, the city administration does not pay much attention to this tax. On the other hand, economic institutionalists have emphasized the relationship between the growth of economic activities and the type of political and economic institutions. Therefore, in this article by game theory approach, the different motivations of local policymakers in determining the green tax are investigated. The green tax rate is considered as a policy tool, and the reaction of polluting industries in choosing the level of investment will also indicate the amount of pollution created. Based on the results, the policymakers take a dual approach to the private and public polluting industries. Assuming the independence of the polluting industries from the government, the policymakers with the motivation of maximizing income, seek to determine the optimal green tax rate. But assuming that the polluting industries have economic benefits for the government, they tend to set the green tax rate lower than the optimal value. Such a rate increases the investment level of polluting industries and the resulting pollution for neighboring cities.
JEL classification: P48. C73. H21. O43.