Exit Incentives for Carbon Emissive Firms

René Aïd, Xiangying Pang and Xiaolu Tan
Additional contact information
René Aïd: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

Post-Print from HAL

Abstract: We develop a continuous-time model of incentives for carbon emissive firms to exit the market based on a compensation payment identical to all firms. In our model, firms enjoy profits from production modeled as a simple geometric Brownian motion and do not bear any environmental damage from production. A regulator maximizes the expected discounted value of firms profits from production minus environmental damages caused by production and proposes a compensation payment whose dynamics is known to the firms. We provide in both situations closed-form expressions for the compensation payment process and the exit thresholds of each firms. We apply our model to the crude oil market. We show that market concentration increases the total expected discounted payments to firms and reduces the expected closing time of polluting assets. A certain degree of market concentration can enable the regulator to halt production in a shorter time but at a higher cost. We extend this framework to the case of two countries each regulating its own market. We analyze scenarios involving two large producers and a combination of large and small producers. Our findings indicate that the proposed model facilitates an earlier exit of brown energy from the market compared to the scenario where each country independently regulates its market. This has significant implications for regulatory strategies aimed at accelerating the transition to cleaner energy sources.

Keywords: Incentives; Auction; Stochastic game; Stopping times; Pollution control (search for similar items in EconPapers)
Date: 2026-02-03
References: Add references at CitEc
Citations:

Published in Dynamic Games and Applications, 2026, ⟨10.1007/s13235-025-00695-7⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05493052

DOI: 10.1007/s13235-025-00695-7

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().