Market power and output-based refunding of environmental policy revenues

Carolyn Fischer*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Output-based refunding of environmental policy revenues combines a tax on emissions with a production subsidy, typically in a revenue-neutral fashion. With imperfect competition, subsidies can alleviate output underprovision. However, when market shares are significant, endogenous refunding reduces abatement incentives and the marginal net tax or subsidy. If market shares differ, marginal abatement costs will not be equalized, and production is shifted among participants. In an asymmetric Cournot duopoly, endogenous refunding leads to higher output, emissions, and overall costs compared with a fixed rebate program targeting the same emissions intensity. These results hold whether emissions rates are determined simultaneously with output or strategically in a two-stage model.

Original languageEnglish
Pages (from-to)212-230
Number of pages19
JournalResource and Energy Economics
Volume33
Issue number1
DOIs
Publication statusPublished - Jan 2011

Keywords

  • Cournot
  • Earmarking
  • Emissions tax
  • Imperfect competition
  • Rebating
  • Tradable performance standards

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