Buying or Performing Abatement: Environmental Policy and Welfare When Commitment Is (Not) Credible
Author(s)
D’Amato, Alessio
Sestini, Roberta
Date Issued
2024
Type
article
Journal
Abstract
We build an asymmetric duopoly model featuring two polluting firms that are heterogeneous in terms of production efficiency. The less efficient firm performs abatement
by buying an environmental good in exchange for a fixed fee, while the more efficient
one engages directly in abatement. In this set-up, we compare two environmental policy settings: one where the regulator commits to policy before observing abatement
investment, and one where such commitment is not credible (i.e. time consistency). We
conclude that, in the latter setting, emission taxes are lower, whilst aggregate profits
and consumers’ surplus are enhanced with respect to the case with commitment. The
welfare ranking is not straightforward, as commitment may make society better off
than under time consistency, depending on the degree of technological asymmetry in
production. Moreover, policy makers might be “trapped” in a time-consistent policy
scenario, due to the interest of involved stakeholders, at the expense of environmental
policy effectiveness.
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