A carbon tax or a subsidy? Policy choice when a green firm competes with a high carbon emitter

Choosing pollution control instrument is an important environmental policy decision. Carbon taxes and subsidies for emissions reductions are two commonly used environmental policies. In practice, the government may be restricted to use only one policy instrument. In this paper, we compare the social welfare effect between policies of a carbon tax and a subsidy. We show that as the marginal environmental damage of the high carbon product increases, the control instrument should change from a subsidy policy to a carbon tax policy. It also turns out that Bertrand competition does not always incur a higher social welfare than Cournot competition when the government intervenes with a pollution control policy.

Automated summary

This paper compares the social welfare effects of carbon taxes and subsidies, indicating that as the environmental damage of high carbon products increases, the policy instrument should shift from subsidies to carbon taxes. Additionally, it is shown that when the government intervenes with pollution control policies, Bertrand competition does not always result in higher social welfare than Cournot competition.