Tradable emission rights and strategic interaction

The use of tradable emission rights as environmental policy instruments may affect the conditions for strategic interaction between regulated firms and thus have implications for competition policy. This paper presents an analysis of how, and under what conditions, emission rights can be used strategically by oligopolistic firms for predatory and exclusionary purposes.     

Tradeable permits,missing markets,and technology

This paper examines the effects of missing markets, heterogeneous pollutants, and the pollution technology of firms on the efficacy of transferable pollution permits. Under the assumption of perfect competition in all markets, we show that if firms can substitute among pollutants, then setting the optimal number of permits for only one pollutant will not, in general, lead to an efficient outcome. The degree of the inefficiency will depend on the information set available to the regulator and the substitutability among pollutants by firms. When establishing transferable pollution rights regulators should, therefore, consider the technology of firms. If firms discharge pollutants in the same fixed proportions, then the regulator need only set a market for one of the pollutants to ensure an efficient outcome. Where firms can substitute among pollutants, however, establishing a market for only one pollutant provides an incentive for firms to substitute to unregulated ones. This is an important policy issue as substitutability among pollutants within and across production processes may dampen the dynamic advantages of a tradeable permit policy.     

产业集聚与公司选址模型分析

本文主要讨论产业集聚中公司选址问题。首先以Pontes（2003）非对称区域中公司选址研究为基础，建立了一个考虑运输成本因素的两区位公司选址模型。在考虑产品运输成本的情况下，生产最终消费品的下游公司将在具有较大消费者市场的地点集聚，在考虑原材料运输成本的情况下，生产原材料的上游公司将会选择与下游公司集聚。文章最后阐述模型的实践意义和政策含义。     

The design of voluntary agreements in oligopolistic markets

This paper analyses the conditions under which a group of firms have the incentive to sign a voluntary agreement (VA) to control polluting emissions even in the presence of free-riding by other firms in the industry. We consider a policy framework in which firms in a given industry decide whether or not to sign a VA proposed by an environmental regulator. We identify the features that a VA should possess in order to provide firms with an incentive to participate in the VA and to enhance its economic and environmental effectiveness. Under very general conditions on the shape of the demand schedule, we obtain the following results. First, a VA does not belong to the equilibrium of the coalition game when benefits from voluntary emission abatement are a pure public good, unless an industry emission target is set by the regulator. Second, in the presence of partial spillovers—i.e. when signatories obtain more benefits from the VA than non-signatories—a VA can belong to the equilibrium only if a minimum participation rule is guaranteed. Third, a VA with a minimum participation rule and a minimum mandatory emission abatement may improve welfare (and even industry profits) compared to a VA in which firms are free to set their own profit maximizing abatement level.     

中国工业企业技术效率分析

本文首先简要介绍了企业技术效率的概念和衡量方法 ,然后结合经济理论 ,利用 1 995年工业普查的数据对影响企业技术效率的各个因素进行了检验。本文的结论主要有 :非国有企业比国有企业的技术效率更高 ;大企业比中小企业的效率更高 ;公共研究机构的R&D支出对企业的效率有负的影响 ,但企业的R&D支出效应正相反 ;FDI的外溢效应主要是通过人员流动等途径而不是技术引进的方式在起作用 ,因而其外溢效应主要体现在一省内部 ,行业内的外溢效应并不明显 ;企业所在各个不同区域对其技术效率有显著的影响。     

Intertemporal Emission Permits Trading Under Uncertainty and Irreversibility

This paper analyzes the effect of emission permit banking on clean technology investment and abatement under conditions where the stringency of the future cap is uncertain. We examine the problem of heterogeneous firms minimizing the cost of intertemporal emission control in the presence of stochastic future pollution standards and emission permits that are tradable across firms and through time. A firm can invest in clean capital (an improved pollution abatement technology) to reduce its abatement cost. We consider two possibilities: that investment is reversible or irreversible. Uncertainty is captured within a two period model: only the current period cap is known. We show that if banking is positive and marginal abatement costs are sufficiently convex, there will be more abatement and investment in clean technology under uncertainty than there would be under certainty and no banking. These results are at odds with the common belief that uncertainty on future environmental policy is a barrier to investment in clean capital. Moreover, under uncertainty and irreversibility, we find that there are cases where banking enables firms to invest more in clean capital.     

Technology, agglomeration, and regional competition for investment

Abstract.  Competition for firms by region has a long-standing history, and the academic literature has debated whether such competition is efficient. We develop a model that explores technology development by firms facing regional competition for their investment and examine the endogenous determination of region policy, firm technology, and agglomeration externalities. We find a new source of inefficiency – regional competition leads firms to inefficiently distort their development and selection of production technology to improve their standing in the regional competition for their investment. We show that these inefficient firm decisions on technology and location can also weaken agglomeration externalities.     

The Effects of Emission Permits on Growth and the Environment

We develop an overlapping generations model of growth and the environment in which industrial firms produce environmentally harmful emissions. A government controls the emissions by assigning emission quotas to firms, and permits could be issued and freely traded as financial instruments across firms on the basis of the quotas. We show that an environmental policy that decreases an aggregate number of emission quotas could degenerate economic growth and lower environmental quality in the long run. We also show the implications of this result for environmental policy.     

Comparing Environmental Policy Instruments Within an Incomplete Contract Framework

This paper compares three different legal means—no environmental policy (the pollutee pays), full liability (the polluter pays), and pollution standards—to reduce and regulate neighborhood externalities within an incomplete contract framework. It turns out that the relative efficiency of these instruments depends, in general, on details. However, moderate standards are preferable to no environmental policy and tight (but not too tight) standards dominate liability. This provides under the given assumptions (neighborhood externalities, incomplete contracts) a justification for “sensible” standards for three reasons. First, unilateral allocations of property rights are biased that distort allocations even if ex post bargaining takes place. Second, a standard is superior in the following sense: if it is set equal to the outcome under any allocation of rights, it will be improved in the process of ex post bargaining. Third, unilateral property rights encourage strategic ex ante investments up to the point that committing to no bargaining would be beneficial (if possible).     

Output‐based rebating of carbon taxes in a neighbour's backyard: Competitiveness,leakage and welfare

We investigate how, in an open economy, carbon taxes combined with output‐based rebating (OBR) perform in interaction with the carbon policies of a large neighbouring trading partner. Analytical results suggest that, whether the purpose of the OBR policy is to compensate firms for carbon tax burdens or to maximize welfare (accounting for global emission reductions), the OBR rate should be positive in policy‐relevant cases. Numerical simulations for Canada, with the US as the neighbouring trading partner, indicate that the impact of US policies on the OBR rate will depend crucially on the purpose of the Canadian OBR policies. If, for a given US carbon policy, Canada's aim is to restore the competitiveness of domestic emission‐intensive and trade‐exposed (EITE) firms to the same level as before the introduction of its own carbon taxation, we find that the necessary domestic OBR rates will be insensitive to the foreign carbon policies. However, if not only the Canadian carbon tax but also an equally high US tax is introduced, compensatory Canadian OBR rates will be up to 50% lower, depending on the sector and on US OBR policy. If the policy objective is to increase economy‐wide allocative efficiency (welfare) of Canadian policies by accounting for carbon leakage, the US policies will have only a minor downward pressure on desirable OBR rates in Canada. Practical choices of OBR rates hardly affect overall domestic economic performance; thus, output‐based rebating qualifies as an instrument for compensating EITE industries without a large sacrifice in terms of economy‐wide allocative efficiency.     

A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities

This paper provides an answer to the question: Are emission taxes an efficient and self-enforcing mechanism to control correlated externality problems? By “correlated externalities” we mean multiple pollutants that are jointly produced by a single source but cause differentiated regional and global externalities. By “self-enforcing” we mean a mechanism that accounts for the endogeneity that exists between competing jurisdictions in the setting of environmental policy within a federation of regions. This mechanism incorporates sequential decision making among the jurisdictions and therefore determines an equilibrium based on the concept of subgame perfection. We find that, unlike joint domestic and international tradable permit markets, joint emission taxes and a hybrid scheme of permits and taxes are neither efficient nor self-enforcing.     

Are clean technology and environmental quality conflicting policy goals?

We analyze the effects of an environmental policy on the diffusion of a clean technology. Compared to previous articles we consider that the polluting firms are competitors on the output market and we analyze the effects of the policy on the share of adopting firms in the economy. We show that this share is not monotonic with the stringency of the environmental policy. We also compare the effects of an emission tax and tradable pollution permits and we show that, depending again on the stringency of the policy, either the tax or the permits yields a higher degree of technology adoption.     

Excess Burden of Taxation and Environmental Policy Mix with a Consumer‐Friendly Firm

This study examines the environmental policy mix of tradable emission permits and emission taxes in a duopoly model with a consumer‐friendly firm. We analyse the interplay of the two policies and the welfare consequences in the presence of excess burden of taxation. We show that an emission tax can be redundant when both the excess burden of taxation and the degree of consumer friendliness are insignificant. However, when the excess burden of taxation is significant, tradable permits policy with tax treatment should be applied to enhance welfare in the presence of a consumer‐friendly firm. Finally, under the tax revenue‐neutral case where the excess burden of taxation does not matter, the environmental policy mix is also efficient if the degree of consumer friendliness is sufficiently high.     

Is emission intensity or output U‐shaped in the strictness of environmental policy?

We show that, in a range of market conditions, an ever stricter environmental policy does not always lead to ever cleaner production methods and ever lower production of polluting goods. We consider an integrated technology, where firms can reduce their emission intensities in a continuous fashion. Analogous to the previous literature we find that firms' emission intensities can be U‐shaped in the strictness of policy, but we show that this applies only under low profitability conditions. Under high profitability conditions, output levels are U‐shaped in the strictness of the policy. The latter result is new in the literature. In the case where the U‐shape arises in emission intensities, the minimum is reached where the marginal abatement cost curves intersect.     

Regulating a Polluting Oligopoly: Emission Tax or Voluntary Agreement?

This paper compares, in a polluting oligopoly, an emission tax and a form of environmental policy called voluntary agreement (VA). Here there are two ways of reducing pollution: output contraction and end‐of‐pipe abatement. Given the imperfect competition, firms’ reaction to the tax is sub‐optimal. They reduce output excessively in order to raise the price and do not abate enough. The VA is a take‐it‐or‐leave‐it contract on abatement effort, offered to the firms with the threat of a tax. It has a limited effect on output and always allows higher abatement than the tax. We find that this kind of VA may be more efficient than the tax in a concentrated industry, when pollution is not too harmful and when the abatement technology is rather efficient and cheap.     

Optimal Allocation of Tradable Pollution Rights and Market Structures

Tradable environmental rights are increasingly pursed as a regulatory instrument, to control for environmental quality. However, in the presence of market power, regulation through an allocation of tradable rights generally yield inefficient outcomes. This article analyzes the effect of the initial distribution of tradable rights on the firms’ strategies and performance in abatement and production, and proposes an efficient criterion for the allocation of tradable rights among firms with market power and competitive fringe firms. The suggested criterion maximizes efficiency of the market based regulation. A simple numerical example illustrates the theoretical discussion.I am very grateful to Richard J. Sexton for useful comments and suggestions. I also wish to thank Giacomo F. Bonanno, the editor, anonymous referees, and participants at the CORE workshop “Industrial Economics and the Environment” (2004) for helpful discussions and comments that improved the paper.     

Production and Abatement Distortions under Noisy Green Taxes

A pollution regulator seeking to maximize social surplus can be viewed as facing two efficiency problems. One is that, given abatement technology investment decisions, it should attempt to ensure that firms which should produce do produce and firms which should not produce do not produce. This ex-post efficiency problem is not trivial when there is noise concerning the extent of environmental damage a firm does. We use a Bayesian information framework to show that the regulator may find it efficient to tax a firm that reads as a high (low) damage polluter at less (more) than the damage reading. Unfortunately when an abatement decision has to be made, this ex-post efficient tax system also dampens the incentive to abate. In the absence of wrong-firm concerns, a regulator can solve the abatement problem by an ex ante declaration that taxes will not be adjusted for signal noise. However, the regulator has a commitment problem as such taxes may not be ex-post efficient. The most appropriate policy may involve a combination of instruments.     

Tax Competition in Vertically Differentiated Markets with Environmentally Conscious Consumers

This paper analyses the effects of tax competition on environmental product quality, pollution and welfare in a two-country, vertically differentiated, international duopoly, in which consumers are environmentally conscious. The firm in each country chooses first the environmental quality of its product (which reflects the emissions generated in the production process) and then the price. In equilibrium one country will be more polluted than the other because firms choose different levels of environmental quality of their products. We find that a country’s optimal commodity tax is higher if the domestic firm is the more polluting supplier. Furthermore, non-cooperative commodity tax rates are inefficiently high in equilibrium. This is because, in this framework with environmentally aware consumers, commodity taxes affect the choice of firms regarding their emissions. Therefore, a domestic tax reduction not only raises the profits of the foreign firm but also lowers its emission levels, resulting in higher welfare for the other country. We also analyse the optimal cooperative and non-cooperative commodity and emission taxes with border tax adjustments. With these two policy instruments available, commodity taxes are higher.     

Standards policy and international trade: Multilateralism versus regionalism

We develop a simple model of policy coordination on domestic standards and examine whether domestic standards policy can lead to regional and multilateral harmonization of standards under the principle of national treatment. This paper focuses on mandatory product and process standards affecting the characteristics of a final good that control negative consumption externalities (e.g., vehicle emissions control and safety standards, restrictions on the use of pesticides for agricultural goods, and safety standards for electrical products). Only the products that meet a country's national standards are allowed to circulate in that country's market. Raising standards reduces negative externalities caused by consumption of a traded good but increases firms’ costs. We use the core as the solution concept. A standards regime is considered to be in the core if it is not blocked by any coalition within countries. The main finding is that a multilateral agreement on standards that maximizes world welfare is only in the core if externalities are local or slightly transboundary. Otherwise, only a regional agreement on standards is in the core. As extensions, we consider many and asymmetric number of firms, asymmetry in market size, fixed costs for different standards, and a multilateral agreement on different standards.     

Optimal combination of innovation and environmental policies under technology licensing

Under what conditions will a carbon tax encourage environmental innovation? Can a regulator design an optimal environmental policy to reduce emissions and to promote clean technologies? This paper studies optimal environmental policy in the situation where a monopoly innovator develops and licenses clean production technologies to downstream polluting firms. We find that (i) a higher emission tax will encourage innovation when the burden of the tax payment in the polluters' costs and/or the price-elasticity of the demand for polluting goods are small, (ii) the innovation-inducing effects of emission tax are inversely related to the emission-reduction (Pigouvian) effects of the tax, and (iii) the social optimum can be achieved by the mix of tax and subsidy. We also show that if the policy instrument is limited to the tax, the second-best tax rate would lie between the marginal damage and the first-best rate. By performing numerical simulations, we also demonstrate that the optimal mix of the emission tax and R&D subsidy can have “double dividend” benefits.