Tax versus regulations: Polluters’ incentives for loosening industry emission targets

We investigate the political incentives of a polluter in affecting industry emission targets (relaxing emission restrictions) imposed by the government in a monopoly market. Specifically, we compare three typical environmental policies—two command-and-control regulations (an emission cap regulation that restricts total emissions and an emission intensity regulation that restricts emissions per output unit), and an emission tax. We presume a policy to be most robust when a less strict emission target (i.e., an increase in the targeted emission level) imposed by the government on the industry increases the firm’s profit least significantly among the three policies. This is because the firm has the least incentives for affecting emission targets. We find that the emission tax is the most robust if the government aims for a net-zero emission society. However, the emission tax is the least robust if the emission target is not ambitious or the government has weak resolve against political pressures from polluters.