Environmental Regulation with and without Commitment under Long Term Investments

Jean-Philippe Nicolaï

Chapter 8 in Green Innovation and Industrial Organization, 2026, pp 191-205 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter analyses the effect of the government’s commitment on the value of emission taxes when firms take long-term investment decisions and perceive a degree of market power in their respective output markets. In the commitment case, the government announces a long-run tax on emissions, and firms decide upon their investment levels. In the case without commitment, the regulator announces a tax level that it is free to modify once firms have made their investments. This chapter illustrates the interactions between firms’ decisions and the regulator’s choice, stressing the role of the strategic effects of investments. The chapter shows that when strategic effects lead firms to reduce investments, the optimal tax under commitment is higher than the no-commitment tax. Otherwise, the tax under commitment may be higher or lower than the tax without commitment.

Keywords: Green Innovation; Industrial Organization; R&D Smoothing; Emissions Tax; Porter Hypothesis; Corporate Social Responsibility; Public Eco-Firm; Foreign Direct Investment (FDI); Environmental Taxes; Voluntary Agreements; Mandatory Regulation; Green Consumers; Green R&D Organization; Environmental Regulation; Sustainable Development (search for similar items in EconPapers)
JEL-codes: F18 L16 L51 Q5 Q55 (search for similar items in EconPapers)
Date: 2026
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