Time-inconsistent environmental policies with a consumer-friendly firm: tradable permits versus emission tax

Garcia, Arturo and Leal, Mariel and Lee, Sang-Ho (2018): Time-inconsistent environmental policies with a consumer-friendly firm: tradable permits versus emission tax.

Abstract

This study considers the timing of environmental policies with a consumer-friendly firm having abatement technology, and compares two market-based regulations: tradable permits and emission tax regulations. When the government can credibly commit its policy, we show that the equilibrium outcomes under both policies are equivalent in terms of permits price and tax rate. Under the non-committed policy, however, the equivalence breaks down because firms have different incentives to induce time-consistent policy to be adjusted ex post. In particular, compared to pre-committed government, firms abate less emission to induce higher emission quotas under the permits policy while a consumer-friendly firm abates more emissions to reduce tax rate under the tax policy. Finally, we show that tax policy can induce higher welfare and lower environmental damage when the concern on consumer surplus is moderate.

• Item Type: MPRA Paper
• Language: English
• Keywords: abatement technology; consumer-friendly firm; environmental policy; tradable permits; emission tax
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L31 - Nonprofit Institutions ; NGOs ; Social Entrepreneurship; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy

References

Borenstein, S., 1988. On the efficiency of competitive markets for operating licenses. Quarterly Journal of Economics 103, 357 - 385.

Brand, B., Grothe, M., 2015. Social responsibility in a bilateral monopoly. Journal of Economics 115, 275 - 289.

Chang, Y.M., Chen, H.Y., Wang, L.F.S., Wu, S.J., 2014. Corporate social responsibility and international competition: A welfare analysis. Review of International Economics 22, 625 - 638.

Denicollo, V., 1999. Pollution-reducing innovations under taxes or permits. Oxford Economic Papers 51, 184-199.

D'Amato, A., Dijkstra, B.R., 2015. Technology choice and environmental regulation under asymmetric information. Resource and Energy Economics 41, 224-247.

Fowlie, M., 2010. Emissions trading, electricity restructuring, and investment in pollution abatement. American Economic Review 100, 837-869.

Gersbach, H., Glazer, A., 1999. Markets and regulatory hold-up problems. Journal of Environmental Economics and Management 37, 151-164.

Goering, G.E., 2012. Corporate social responsibility and marketing channel coordination. Research in Economics 66, 142-148.

Goering, G.E., 2014. The profit-maximizing case for corporate social responsibility in a bilateral monopoly. Managerial and Decision Economics 35, 493-499.

Hsu, C.C., Lee, J.Y., Wang, L., 2017. Consumers awareness and environmental policy in differentiated mixed oligopoly. International Review of Economics and Finance 51, 444-454.

Kato, K., 2006. Can allowing to trade permits enhance welfare in mixed oligopoly? Journal of Economics 88, 263-283.

Kato, K., 2011. Emission quota versus emission tax in a mixed duopoly. Environmental Economics and Policy Studies 13, 43-63.

Kopel, M., Brand, B., 2012. Socially responsible firms and endogenous choice of strategic incentives. Economic Modelling 29, 982-989.

Lambertini, L., Tampieri, A., 2015. Incentives, performance and desirability of socially responsible firms in a cournot oligopoly. Economic Modelling 50, 40-48.

Leal, M., Garcia, A., Lee, S.H., 2018. The timing of environmental tax policy with a consumer-friendly firm. Hitotsubashi Journal of Economics 59, 25-43.

Lee, S.H., 1996. An optional permit system for global pollution control. Economics Letters 50, 79-84.

Lee, S.H., Kim, I.T., 2000. Self-selection and optimal nonlinear effuent charges. Environmental and Resource Economics 16, 1-14.

Lee, S.H., Kim, J.C., 1995. Oligopolistic incentives for pollution control with nonzero conjectures. Economics Letters 49, 95-99.

Lee, S.H., Matsumura, T., Sato, S., 2018. An analysis of entry-then-privatization model: welfare and policy implications. Journal of Economics 123, 1-18.

Lee, S.H., Park, S.H., 2005. Tradable emission permits regulations: The role of product differentiation. 355 International Journal of Business and Economics 4, 249-261.

Lian, X., Gong, Q., Wang, L., 2018. Consumer awareness and ex-ante versus ex-post environmental policies revisited. International Review of Economics and Finance 55, 68-77.

Malueg, D., 1990. Welfare consequences of emission credit trading programs. Journal of Environmental Economics and Management 18, 66-77.

Matsumura, T., Ogawa, 360 A., 2014. Corporate social responsibility or payoff asymmetry? a study of an endogenous timing game. Southern Economic Journal 81, 457-473.

Moner-Colonques, R., Rubio, S., 2015. The timing of environmental policy in a duopolistic market. Economia Agraria y Recursos Naturales 15, 11-40.

Montero, J., 2011. A note on environmental policy and innovation when governments cannot. Energy 365 Economics 33, S13-S19.

Ohori, S., 2006. Optimal environmental tax and level of privatization in an international duopoly. Journal of Regulatory Economics 29, 225-233.

Pal, R., Saha, B., 2015. Pollution tax, partial privatization and environment. Resource and Energy Economics 40, 19-35.

Petrakis, E., Xepapadeas, A., 1999. Does government precommitment promote environmental innovation? In Environmental Regulation and Market Power: Competition, Time Consistency and International Trade, Edward Elgar Publishing , 145-161.

Petrakis, E., Xepapadeas, A., 2001. To commit or not to commit: Environmental policy in imperfectly competitive markets. Working paper, University of Crete .

Poyago-Theotoky, J., Teerasuwannajak, K., 2002. The timing of environmental policy: A note on the role of product differentiation. Journal of Regulatory Economics 21, 305-316.

Requate, T., 1993. Pollution control in a cournot duopoly via taxes or permits. Journal of Economics 58, 255-291.

Requate, T., Unold, W., 2003. Environmental policy incentives to adopt advanced abatement technology: Will the true ranking please stand up? European Economic Review 47, 125-146.

Rode, A., 2014. Rent-seeking over tradable emission permits: Theory and evidence. Working paper, University of Chicago

Sartzetakis, E., 1997. Tradeable emission permits regulations in the presence of imperfectly competitive product markets: Welfare implications. Environmental and Resource Economics 9, 65-81.

Sartzetakis, E., 2004. On the efficiency of competitive markets for emission permits. Environmental and Resource Economics 27, 1-19.

Stavins, R., 1998. What can we learn from the grand policy experiment? lessons from so2 allowance trading. Journal of Economic Perspectives 12, 69-88.

Wang, L., Wang, J., 2009. Environmental taxes in a differentiated mixed duopoly. Economic Systems 390 33, 389-396.

Wirl, F., 2014. Taxes versus permits as incentive for the intertemporal supply of a clean technology by a monopolist. Resource and Energy Economics 36, 248-269.

Xu, L., Cho, S., Lee, S.H., 2016. Emission tax and optimal privatization in cournot-bertrand comparison. Economic Modelling 55, 73-82.

Xu, L., Lee, S.H., 2015. Strategic privatization with tariffs and environmental taxes in an international mixed duopoly. Hitotsubashi Journal of Economics 56, 135-154.

Xu, L., Lee, S.H., 2018. The timing of environmental policies with excess burden of taxation in free-entry mixed markets. International Review of Economics and Finance Article in Press.

Xu, L., Lee, S.H., Matsumura, T., 2017. Ex-ante versus ex-post privatization policies with foreign penetration in free-entry mixed markets. International Review of Economics and Finance 50, 1-7.