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Environmental regulation with and without commitment under irreversible investments

Author

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  • 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
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Pollution permits; Imperfect competition; Investment; Strategic effects.;
    All these keywords.

    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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