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Environmental policies in a Stackelberg differential game

Author

Listed:
  • Roy Cerqueti

    (GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - Institut Agro Rennes Angers - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement)

  • Luca Correani
  • Fabio Di Dio

Abstract

We develop a Stackelberg differential game to analyze the economic effects of the reduction plan through two policy instruments, tradable permits and taxes on emissions. Emissions are a by‐product of firm output. The authority acts as a Stackelberg leader, able to set the optimal instrument's level in the light of a finite‐horizon environmental target. We show that the optimal solution of the game is dynamically consistent. Moreover, optimal environmental policies substantially impact the level and composition of economic activity. The differentiation between "clean" and "dirty" firms allows us to assess distributional effects and how environmental technology may influence the game's outcome. Results are shown to be robust under different parameterizations.

Suggested Citation

  • Roy Cerqueti & Luca Correani & Fabio Di Dio, 2023. "Environmental policies in a Stackelberg differential game," Post-Print hal-04321326, HAL.
    • Handle: RePEc:hal:journl:hal-04321326
    DOI: 10.1002/nav.22099
    as

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