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Entry, exit, and instrument choice in environmental regulation

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  • Nikula Harri

    (Faculty of Management and Business, Tampere University)

Abstract

We study market-based regulation where a government tries to avoid excessive firm closures by providing reliefs from emission fees for incumbent firms. Regulation is asymmetric as only incumbents, not new entrants are subsidized by the payment reliefs. We ask whether this feature affects the choice between environmental taxes and tradable permits under uncertainty. We find a trade-off between tax-beneficial inefficiency effect and permit-beneficial volume effect. The latter effect arises as the free quotas makes the number of aggregate permits and the aggregate emissions to fluctuate in the quantity implementation. We show that the subsidization of incumbent firms does not unambiguously favor one of the instruments but the advantage depends on policy- and industry-specific factors.

Suggested Citation

  • Nikula Harri, 2020. "Entry, exit, and instrument choice in environmental regulation," Working Papers 2026, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:2026
    as

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    File URL: http://urn.fi/URN:ISBN:978-952-03-1592-4
    File Function: First version, 2020
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Emission taxation; firm closure; environmental subsidies; tradable emission permits; uncertainty;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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