Average markup and welfare in Cournot oligopoly with environmental policies

In recent years, governments worldwide have implemented various environmental policies to combat environmental degradation. Most of these policies use either emission taxes or tradable permits, sometimes in combination. This paper employs a Cournot oligopoly model to compare the effects of these two policy instruments, focusing on emissions from both polluting (brown) and clean (green) firms. Our findings indicate that i) taxing emissions leads to higher social welfare than tradable permits, especially in concentrated markets; ii) both policy instruments are superior to a no-policy scenario in competitive markets; iii) the welfare gap between these regimes increases when differences in abatement technology diminish or when there are fewer clean firms; iv) imposing taxes on polluting firms results in a higher average markup, particularly in more concentrated markets.