Optimal energy-saving investments and Jevons Paradox in duopoly markets

Kosuke Hirose and Toshihiro Matsumura

Energy Economics, 2025, vol. 147, issue C

Abstract: This study theoretically investigates energy-saving investment incentives in duopolies. First, we investigate a binary choice model in which each firm chooses whether to make an energy-saving investment and then they face Cournot competition. We focus on the incentive to become the leading firm by the investment, when the rival does not engage in this project. We find the private incentive to be insufficient for welfare (thereby requiring promotion through policies), if Pigouvian tax is imposed. However, this incentive can be excessive when the emission tax rate is lower than the Pigouvian level. Next, we investigate a model in which firms can choose energy-saving investment levels continuously. We find that the equilibrium investment can be (is not) excessive for welfare when the emission tax rate is lower than (equal to) the Pigouvian. These results suggest that policy formation combining a low emission tax and subsidies for promoting energy-saving investments may harm welfare. Moreover, we find that drastic innovation rather than minor improvement of energy efficiency should be subsidized because the former less likely leads to Jevons paradox.

Keywords: Emission tax; Investment subsidy; Policy combination; Energy-conservation; Production substitution (search for similar items in EconPapers)
JEL-codes: L13 Q38 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:147:y:2025:i:c:s0140988325003688

DOI: 10.1016/j.eneco.2025.108544

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