Entry, exit, and instrument choice in environmental regulation

Harri Nikula
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Harri Nikula: Faculty of Management and Business, Tampere University

No 2026, Working Papers from Tampere University, Faculty of Management and Business, Economics

Abstract: We study market-based regulation where a government tries to avoid excessive firm closures by providing reliefs from emission fees for incumbent firms. Regulation is asymmetric as only incumbents, not new entrants are subsidized by the payment reliefs. We ask whether this feature affects the choice between environmental taxes and tradable permits under uncertainty. We find a trade-off between tax-beneficial inefficiency effect and permit-beneficial volume effect. The latter effect arises as the free quotas makes the number of aggregate permits and the aggregate emissions to fluctuate in the quantity implementation. We show that the subsidization of incumbent firms does not unambiguously favor one of the instruments but the advantage depends on policy- and industry-specific factors.

Keywords: Emission taxation; firm closure; environmental subsidies; tradable emission permits; uncertainty (search for similar items in EconPapers)
JEL-codes: D62 D81 H23 Q58 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020-05
New Economics Papers: this item is included in nep-ene, nep-env, nep-pub, nep-reg and nep-res
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http://urn.fi/URN:ISBN:978-952-03-1592-4 First version, 2020 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tam:wpaper:2026

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