Emission taxes and feed-in subsidies in the regulation of a polluting monopoly
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Emission taxes and feed-in subsidies in the regulation of a polluting monopoly Ángela García-Alaminos1
· Santiago J. Rubio2
Received: 28 February 2020 / Accepted: 30 September 2020 © The Author(s) 2020
Abstract The paper studies the use of emission taxes and feed-in subsidies for the regulation of a monopoly that can produce the same good with a technology that employs a polluting input and a clean technology. In the first part of the paper, we show that the efficient solution can be implemented combining a tax on emissions and a subsidy on clean output. The tax is lower than the environmental damages, and the subsidy is equal to the difference between the price and the marginal revenue. In the second part of the paper, the second-best tax and subsidy are also calculated solving a two-stage policy game between the regulator and the monopoly with the regulator acting as the leader of the game. We find that the second-best tax rate can be the Pigouvian tax, but only if the marginal costs of the clean technology are constant. Using a linear–quadratic specification of the model, we show that the clean output is larger when a feed-in subsidy is used than when the tax is applied, but the dirty output can be larger or lower depending on the magnitude of marginal costs of the clean technology and marginal damages. The same occurs for the net social welfare, although we find that for low enough marginal costs of the clean technology, the net social welfare is larger when a feed-in subsidy is used to promote clean output regardless the importance of the marginal damages. Keywords Monopoly · Polluting inputs · Clean technology · Production-mix · Emission tax · Feed-in subsidy
The authors would like to thank two anonymous referees for their very constructive comments and also to participants at the Third AERNA Workshop on Game Theory and the Environment (Valencia, September 2019) and the 15th Conference of the Spanish Association for Energy Economics (Toledo, January 2020) for stimulating discussion. Santiago J. Rubio gratefully acknowledges financial support from the Spanish Ministry of Economics and Competitiveness under project ECO2016-77589-R, the Spanish Ministry of Science, Innovation and Universities under project PID2019-107895RB-I00, and from the Valencian Generality under project PROMETEO/2019/095, and Ángela García-Alaminos gratefully acknowledges financial support from the European Social Fund and University of Castilla-La Mancha through the Regional FPI Program and from the Spanish Ministry of Universities through the National FPU Program (Grant ref. FPU18/00738). Extended author information available on the last page of the article
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SERIEs
JEL Classification D42 · H23 · L12 · Q58
1 Introduction Environmental regulation of a polluting monopoly is an interesting case of regulation since the market equilibrium can be inefficient because two market failures are operating at the same time but in an opposite direction. On the one hand, the firm’s market power leads to a contraction of output and emissions b
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