Effects of carbon tariffs trading policy on duopoly market entry decisions and price competition: Insights from textile firms of developing countries

Some developed countries are considering to implement a controversial climate policy called the carbon tariffs policy on the developing-country firms which produce in their own countries and transport goods, such as textiles, to the developed-country markets. This policy has significant impacts on international trade and business. To examine this policy, we consider the scenario in which a developing-country firm and a developed-country firm both manufacture the same type of textile products (which are differentiated but partially substituted). Thus, the cost differences between these two firms establish a price competition model. This model is solved through a two-stage game, where each firm chooses its emissions reduction technology in the first stage and decides its price in the second stage. We explore the effects of carbon tariffs on developing-country firms and offer coping strategies for them. Furthermore, the effects of carbon tariffs on total carbon emissions and global social welfare are also analyzed. We conclude that: (i) carbon tariffs greatly threaten the survival of developing-country firms in the developed-country market; (ii) both total carbon emissions and global social welfare are reduced in the presence of carbon tariffs; (iii) the textile firms of developing countries should make efforts to (1) choose the appropriate technology for emissions reduction, (2) reduce their cost of emissions reduction and (3) reduce the product differences with those developed-country firms.