Conference Agenda

We examine investment in abatement allowing for non-negligible usage costs, identifying how environmental regulation and investment decisions are affected by these costs. Under monopoly, we find two equilibrium outcomes. First, full usage equilibrium arises when an expensive investment in abatement is accompanied by a low usage cost, which is in line with the previous literature. Second, partial usage equilibrium is supported if investment and usage costs are substantial, calling for more stringent emission fees. Under oligopoly, we observe similar results, but the full usage equilibrium is more likely to arise, especially when environmental damages are severe. Our results imply that generous investment subsidies, while triggering more abatement, can unintentionally become ineffective if they ignore capacity usage decisions.

This paper studies how investments in abatement affect merger decisions. We show that aggregate abatement needs to reach a minimum threshold to induce a merger approval, which is analogous to public good games with threshold effects. This can provide firms with stronger incentives to invest in abatement than in traditional models, reducing net emissions, and requiring less stringent emission fees than in settings where firms do not face merger prospects. Our extensions explore different regulatory regimes, alternative timings, allowing for environmental research cartels, cost convexities, and spillovers, identifying in each case how mergers are affected.

This paper explores the relationship between competition and the emission intensity used by firms when a tax on emissions is applied. An oligopolistic model is presented where firms produce a homogeneous good and compete in quantities. In this setting, the intensity of competition is represented by the number of firms in the industry. It is shown that an increase in emission tax encourages firms to adopt a cleaner technology and reduce output, yielding a reduction on emissions. Assuming a linear demand and quadratic marginal cost in the emission intensity, it is established that as competition increases, the optimal tax raises and the emission intensity decreases. Thus, competition promotes green innovation. Although individual output and emissions are reduced, industry output and emissions increase due to a higher number of firms in the market.

Within a context where firms can choose between exporting or engaging in Foreign Direct Investment (FDI), this paper examines how domestic environmental regulations are affected by the type of pollutant, i.e., local versus transboundary. We allow firms to choose between clean and dirty technologies in each market they operate in, and endogenize the licensing process to access cleaner technologies. A key finding is that the impact of the type of pollutant on emission tax is industry-specific. In industries with "footloose" firms, we show that taxes for transboundary pollutants are lower than for local pollutants. By contrast, in industries with high fixed costs of setting up foreign subsidiaries, this result is reversed.