Partial cross-ownership and strategic environmental policy

► We analyze the effect that passive investment in rival firms has on environmental taxes. ► We consider two firms located in different countries, one of which owns a stake in its rival. ► Partial cross-ownership affects the cooperative and non-cooperative taxes set by the countries. ► Cooperative taxes may be higher or lower than non-cooperative taxes. This paper analyzes the effect of passive investment in rival firms on the setting of cooperative and non-cooperative environmental taxes. We consider two firms located in different countries, with each firm owning the same percentage of the stock of its rival. We show that bilateral partial cross-ownership affects the taxes set by the countries in the cooperative and non-cooperative cases. When the stake that one firm has in its rival is great enough and environmental spillovers are low enough, cooperative taxes are lower than non-cooperative taxes. For the remaining values of parameters the opposite result is obtained.