Most of the literature dealing with Environmental Policies (EPs) in the presence of an eco-industry adopts very restrictive assumptions, as that of exogenous timing in setting EPs with the government moving first in choosing the emission tax level, and that of symmetric firms in the downstream sector.
Starting from these drawbacks, we plan to build a model with two asymmetric downstream firms and an upstream eco-industry, and under the assumption that the more efficient firm may either obtain the environmental technology from the innovator, or engage in abatement effort or finally do not abate at all. In this set-up, we want to compare the optimal tax levels that would be imposed if the government can commit to an ex-ante emission tax level or rather it sets its tax rate ex-post. The analysis of two different policy regimes- the ex-ante and the ex-post one - allows us to incorporate the hypothesis that firms react strategically to any government decision. In the first regime, the government can commit to a specific tax level while in the second regime firms, knowing that the government is unable to commit, will anticipate the government decision.
We plan then to assess whether the optimal tax differs from the Pigouvian prescription, and the effects of EP on environmental innovation, on overall emissions reduction and on social welfare under the two different policy regimes.
In the literature on optimal emission taxation usually the environmental regulator acts as a Stackelberg leader choosing the tax level to maximize a social welfare indicator. This approach neglects the temporal structure of the problem and thus prevents us from tackling time consistency and credibility issues associated to EP design.
In the first part of our research, we attempt to tackle two aspects at once: (i) the temporal dimension in EP making; (ii) the effects of assuming a vertical structure with an upstream eco-industry and two downstream asymmetric firms.
More specifically, we aim at modelling two distinct policy games, the ex-ante and the ex post one. Under the former policy scenario, we propose the standard approach for determining the optimal emission tax, where the government precommits to the emission tax level and moves first, while firms behave as Stackelberg followers. Instead, in the second scenario, government's policy lack of credibility and the firm(s), rationally anticipating this, can move first and strategically determine the abatement effort in order to affect the emission tax level.
At the first stage, we assume that that one of the two downstream firms - the less efficient one - obtains all its consumption of the environmental good (EG) from a monopolistic innovator, while the more efficient firm, on the contrary, has the capability to engage in abatement effort. This set-up draws upon a companion paper (Sestini and Pugliese, 2021) where it is shown that, under exogenous (and moderate) emission taxation, the "mixed" configuration with one firm (the more efficient one) engaging in environmental innovation and the rival firm obtaining a license represents an equilibrium for a wide set of parameters values.
The novelty of our approach is acknowledged by some of the most influential scholars in this strand of literature. Notably, David and Sinclair-Desgagnè (2010) close their paper by claiming that "studying the consequences of other relevant and more complex industry structures, however, (with asymmetric environment firms or polluters also able to make their own abatement goods) will require additional research".
In the second part of our research, we want to introduce a further stage in the above described policy games, namely we let the external innovator auction-off an exclusive license for its technology (see on this point the seminal paper by Katz and Shapiro, 1985; and Stamatopoulos and Tauman 2009; Miao 2013). In so doing, the downstream market structure will be endogenously determined thus enriching the analysis.
References
David, M., & Sinclair-Desgagnè, B. (2010). Pollution abatement subsidies and the eco-industry. Environmental & Resource Economics, 45, 271-282.
Katz M. and Shapiro C., (1985). On the Licensing of Innovations. The RAND Journal of Economics, vol. 16, issue 4, 504-520
Miao C. (2013). On the superiority of fixed fee over auction in technology licensing. The Manchester School, Vol 81 No. 3, 324-331.
Sestini R. and D. Pugliese (2021). To buy or to do it yourself? Pollution policy and environmental goods in developing countries. J. Ind. Bus. Econ. 48, 105-135.
Stamatopoulos G. and Tauman T. (2009). On the superiority of fixed fee over auction in asymmetric markets. Games and Economic Behavior, 67 (1), 331-333.