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Modeling the Linkage between Vertical Contracts and Strategic Environmental Policy: Energy Price Marketization Level and Strategic Choice for China

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  • Ying Li

    (China Center for Special Economic Zone Research, Shenzhen University, Shenzhen 518060, China)

  • Wing-Keung Wong

    (Department of Finance, Fintech & Blockchain Research Center, and Big Data Research Center, Asia University, Taichung City 41354, Taiwan
    Department of Medical Research, China Medical University Hospital, Taichung City 40402, Taiwan
    Department of Economics and Finance, The Hang Seng University of Hong Kong, Hongkong 999077, China)

  • Ming Jing Yang

    (Department of Finance, College of Finance, Feng Chia University, Taichung 40724, Taiwan)

  • Yang-Che Wu

    (Department of Finance, College of Finance, Feng Chia University, Taichung 40724, Taiwan)

  • Tien-Trung Nguyen

    (Faculty of Accounting and Finance, Nguyen Tat Thanh University, Ho Chi Minh 70000, Vietnam)

Abstract

The lower price of energy leads to higher coal consumption in China. The idea of an “environment-for-trade policy” could be used to achieve an international competitive advantage, which, in turn, has important implications. To address the issue, we develop properties to examine the link between the low price of energy and strategic environmental policy in China and investigate the choice of policy instruments in a strategic environmental policy model with vertical contracts. In addition, to contribute to the literature on strategic environmental policy, this paper also develops properties to investigate different choices of instruments for the environmental policy and includes the degree of energy marketization for the wholesale price in the study. To do so, we assume that the wholesale price of the polluting input increases with the market price. By using this assumption, this paper analyzes the effects of two instruments of the environmental policy on social welfare and concludes that there is no reason to expect both downstream and upstream firms to establish a high wholesale price. Due to the low level of marketization, when the government selects an emission tax as the policy instrument, the optimal tax rates should be higher than the marginal damage of emissions. However, the optimal resource tax is uncertain when its effect on environmental damage is taken into account. In other words, the resource tax is ineffective as a policy instrument. Our results can be used to draw some practical policies for countries to use their energy effectively. To promote energy sustainability, governments should liberate resource prices and reform the system to get efficient environmental policies.

Suggested Citation

  • Ying Li & Wing-Keung Wong & Ming Jing Yang & Yang-Che Wu & Tien-Trung Nguyen, 2022. "Modeling the Linkage between Vertical Contracts and Strategic Environmental Policy: Energy Price Marketization Level and Strategic Choice for China," Energies, MDPI, vol. 15(13), pages 1-12, June.
    • Handle: RePEc:gam:jeners:v:15:y:2022:i:13:p:4509-:d:843623
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    References listed on IDEAS

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