Carbon-neutral emissions taxes in oligopolistic industries and competition structure

Motivated by the global trend toward carbon neutrality, this study investigates the relationship between emissions tax rates that achieve net-zero emissions and market competition. Specifically, we examine how the number of firms, the degree of payoff interdependence among firms, the mode of competition, and the level of product differentiation affect the carbon-neutral emissions tax. We find that, in a standard model formulation, the carbon-neutral emissions tax decreases as the number of firms increases (Proposition 1), whereas it increases as the degree of payoff interdependence weakens (Proposition 2). Proposition 1 (2) suggests that the carbon-neutral tax rate is lower (higher) when industry competition is more intense. However, upon further analysis, we conclude that stronger competition leads to higher carbon-neutral emissions tax rates. Specifically, when industry cost efficiency is independent of the number of firms, the carbon-neutral emissions tax increases with the number of firms (Proposition 3). This finding indicates that the number of firms might not always be a reliable measure of market competitiveness without appropriate adjustments. Additionally, we compare two competition modes, Bertrand and Cournot competition, and investigate the effect of product differentiation. We obtain similar results. Our findings suggest that carbon neutrality can be achieved with a lower emissions tax than that estimated under perfect competition, because most heavy-emissions industries are characterized by imperfect competition.