Three Essays on Environmental Economics and Industrial Organization:Tradable Permits, Environmental R&amp;D and Taxation
Creators: name: Liu, Jianqiao
Publisher: name: Université d'Ottawa / University of Ottawa
Year: 2011
Subjects: Tradeable permits
R&amp;D
Emissions tax

description: Chapter 1: Tradable Permits under Environmental and Cost-reducing R&amp;D: This chapter models simultaneous investments in both environmental and cost-reducing R&amp;D by asymmetric Cournot duopolist. Pollution rights (emission permits) are allocated by the regulator and can be traded between firms. Both R&amp;D competition and cooperation are considered. In a three-stage game, firms first invest in R&amp;D, then trade permits, and then compete in output. The strategic interaction between different types of R&amp;D investments is analyzed. It is found that giving more permits to one firm induces it to conduct more cost-reducing but less environmental R&amp;D. The second-best optimal allocation of pollution rights is also analyzed. This allocation matters for social welfare under R&amp;D competition, but is irrelevant under R&amp;D cooperation. Moreover, the optimal allocation depends on R&amp;D spillovers. This paper also studies the grandfathering of permits based on historical output. Compared with the second-best optimal allocation, the higher the emissions reduction level, the more likely that grandfathering allocates too few permits to the large firm and too many permits to the small firm. Adding an R&amp;D budget constraint leads firms to under-invest in cost-reducing R&amp;D relative to environmental R&amp;D. Chapter 2: Tradable Permits under Environmental R&amp;D between Upstream and Downstream Industries: This chapter models the simultaneous investments in environmental R&amp;D by both downstream and upstream industries, with two symmetric firms within each industry competing à la Cournot. Pollution rights are allocated by the regulator, and firms can trade permits. R&amp;D competition, intra-industry (horizontal), inter-industry (vertical) and both intra- and inter-industry (generalized) R&amp;D cooperations are considered. In a four-stage game, firms first invest in R&amp;D, then trade permits, then upstream firms compete in intermediate good production, and finally downstream firms compete in final food production. The strategic interactions between R&amp;D investments are analyzed. It is found that an increase in either vertical or horizontal R&amp;D spillovers reduce the permit price but increase production, but the spillover effects on R&amp;D investments are ambiguous and they depend on the number of permits that a firm receives from the government. However, firms undertake more R&amp;D under generalized cooperation than vertical cooperation, irrespective of spillovers and the allocation of permits, and this results in higher social welfare under generalized cooperation than vertical cooperation. The optimal allocation of pollution rights by the regulator is also considered. This allocation matters for social welfare under R&amp;D competition and horizontal cooperation, but is irrelevant under vertical and generalized cooperations. Chapter 3: Is There a Principle of Targeting in Environmental Taxation?: This chapter studies whether the "principle of targeting", which is referred to by Dixit (1985) as the tax formulae for dirty goods have "additivity property" (Sandmo 1975) and externality-generating sources should be directly targeted (Bhagwati and Johnson 1960), can be applicable in the presence of a uniform commodity tax with an additional emissions tax. We consider three perfectly competitive markets, one of them produces a non-polluting good and the other two produce polluting goods. The regulator chooses optimal taxes on all three markets to maximize social welfare and finances an exogenous public expenditure. First all, it is found that the additivity property does not hold under differentiated taxes, and is even further weakened with a uniform commodity tax. It is also shown that the Pigouvian tax is unlikely to apply on the top of the uniform commodity tax. Furthermore, if there is only tax instrument available -- i.e. either the uniform commodity tax or the emissions tax -- then the uniform commodity tax (emissions tax) induces higher social welfare when marginal social damage is low (high).