Emission taxes and environmental R&D risk choices in a duopoly market

This study investigates how an emission tax rate affects risk choices in environmental research and development (ER&D) in Cournot and Bertrand duopolies. Firms choose the variance of their ER&D projects and compete in a differentiated product market. We find that the degree of risk increases in the emission tax rate and decreases in the degree of product differentiation. We further find that firms take considerable welfare risks when the emission tax rate is high relative to marginal environmental damage. Moreover, we find that firms choose riskier projects under Bertrand competition than under Cournot competition. This study helps firm managers choose appropriate ER&D projects in their competitive environments and helps policymakers formulate reasonable environmental tax policies.

Automated summary

The study reveals that an increase in emission tax rate leads to higher levels of risk, while a decrease in product differentiation reduces risk. Companies are willing to take greater welfare risks when the emission tax rate exceeds marginal environmental damage. Under Bertrand competition, firms are more likely to choose riskier projects compared to Cournot competition.