Modeling the Linkage between Vertical Contracts and Strategic Environmental Policy: Energy Price Marketization Level and Strategic Choice for China

Ying Li, Wing-Keung Wong, Ming Jing Yang, Yang-Che Wu and Tien-Trung Nguyen
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Ying Li: China Center for Special Economic Zone Research, Shenzhen University, Shenzhen 518060, China
Ming Jing Yang: Department of Finance, College of Finance, Feng Chia University, Taichung 40724, Taiwan
Yang-Che Wu: Department of Finance, College of Finance, Feng Chia University, Taichung 40724, Taiwan
Tien-Trung Nguyen: Faculty of Accounting and Finance, Nguyen Tat Thanh University, Ho Chi Minh 70000, Vietnam

Energies, 2022, vol. 15, issue 13, 1-12

Abstract: The lower price of energy leads to higher coal consumption in China. The idea of an “environment-for-trade policy” could be used to achieve an international competitive advantage, which, in turn, has important implications. To address the issue, we develop properties to examine the link between the low price of energy and strategic environmental policy in China and investigate the choice of policy instruments in a strategic environmental policy model with vertical contracts. In addition, to contribute to the literature on strategic environmental policy, this paper also develops properties to investigate different choices of instruments for the environmental policy and includes the degree of energy marketization for the wholesale price in the study. To do so, we assume that the wholesale price of the polluting input increases with the market price. By using this assumption, this paper analyzes the effects of two instruments of the environmental policy on social welfare and concludes that there is no reason to expect both downstream and upstream firms to establish a high wholesale price. Due to the low level of marketization, when the government selects an emission tax as the policy instrument, the optimal tax rates should be higher than the marginal damage of emissions. However, the optimal resource tax is uncertain when its effect on environmental damage is taken into account. In other words, the resource tax is ineffective as a policy instrument. Our results can be used to draw some practical policies for countries to use their energy effectively. To promote energy sustainability, governments should liberate resource prices and reform the system to get efficient environmental policies.

Keywords: strategic environmental policy; marketization degree; vertical structure (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2022
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