Environmental regulation with and without commitment under irreversible investments

Jean-Philippe Nicolai ()
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Jean-Philippe Nicolai: ETH Zurich, Switzerland

No 13/187, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: This paper analyzes the long-term investment decisions of firms that are regulated by an emissions tax and that perceive a degree of market power in their respective output markets. Firms invest in abatement equipment that is fixed over the medium term (e.g., buying a new generator). This paper focuses on environmental regulation with and without commitment. In the commitment case, the government announces a long-run tax on emissions, and firms decide upon their investment levels. In the no-commitment case, the regulator announces a tax level and is free to modify it once firms have invested. This paper considers differentiated product goods and determines whether no-commitment regulation leads to more lenient or more stringent regulation than regulation with commitment.

Keywords: Pollution permits; imperfect competition; investment; strategic effects (search for similar items in EconPapers)
JEL-codes: L13 L51 Q50 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2013-11
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