Carbon policy in presence of a consumer-friendly firm

This dissertation studies the implications of the emergence of a consumer-friendly firm in a duopolistic polluting industry when the regulator can or not commit credibly to an environmental instrument, such as an emission tax or a tradable permits policy. The welfare and environmental consequences are examined. It also investigates the conditions under which one of these instruments is superior to the other. In the second chapter, the study considers a Cournot duopoly model with a consumer-friendly firm and analyzes the interplay between the strategic choice of abatement technology and the timing of government’s commitment to the environmental tax policy. We show that the optimal emission tax under committed policy regime is always higher than that under non-committed one, but both taxes can be higher than marginal environmental damage when the consumer-friendliness is high enough. We also show that the emergence of a consumer-friendly firm might yield better outcomes to both welfare and environmental quality without the commitment to the environmental policy. The third chapter considers the timing of environmental policies with a consumerfriendly firm having abatement technology and compares two market-based regulatory instruments, tradable permits, and emission tax regulations. When the government can credibly commit its policy, we show that the equilibrium outcomes under both policies are equivalent in terms of permits price and tax rate. Under the non- committed policy, however, the equivalence breaks down because firms have opposite incentives to induce time-consistent policy to be adjusted ex-post. In particular, compared to pre-committed government, firms abate less emission to induce higher emission quotas under the permits policy while a consumer-friendly firm abates more emissions to reduce tax rate under the tax policy. Finally, we show that tax policy will result in higher welfare and lower environmental damage unless the concern on consumer surplus is considerable