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Environmental regulation with and without commitment under irreversible investments

Author

Listed:
  • Jean-Philippe Nicolaï

    () (ETH-Zürich)

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 with- out 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.

Suggested Citation

  • Jean-Philippe Nicolaï, 2015. "Environmental regulation with and without commitment under irreversible investments," Working Papers 2015.19, FAERE - French Association of Environmental and Resource Economists.
  • Handle: RePEc:fae:wpaper:2015.19
    as

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    File URL: http://faere.fr/pub/WorkingPapers/Nicolai_FAERE_WP2015.19.pdf
    File Function: First version, 2015
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    References listed on IDEAS

    as
    1. Juan-Pablo Montero, 2011. "End of the line: A Note on Environmental Policy and Innovation when Governments cannot Commit," Documentos de Trabajo 394, Instituto de Economia. Pontificia Universidad Católica de Chile..
    2. Montero, Juan Pablo, 2011. "A note on environmental policy and innovation when governments cannot commit," Energy Economics, Elsevier, vol. 33(S1), pages 13-19.
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    4. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Pollution permits and compliance strategies," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 85-125, October.
    5. Gregory S. Amacher & Arun S. Malik, 2002. "Pollution Taxes When Firms Choose Technologies," Southern Economic Journal, Southern Economic Association, vol. 68(4), pages 891-906, April.
    6. Barnett, A H, 1980. "The Pigouvian Tax Rule under Monopoly," American Economic Review, American Economic Association, vol. 70(5), pages 1037-1041, December.
    7. Gersbach, Hans & Glazer, Amihai, 1999. "Markets and Regulatory Hold-Up Problems," Journal of Environmental Economics and Management, Elsevier, vol. 37(2), pages 151-164, March.
    8. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Pollution permits and environmental innovation," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 127-140, October.
    9. Perino, Grischa & Requate, Till, 2012. "Does more stringent environmental regulation induce or reduce technology adoption? When the rate of technology adoption is inverted U-shaped," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 456-467.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Pollution permits; Imperfect competition; Investment; Strategic effects.;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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