Using contests to design emission tax mechanisms

Identifier:  imarina:9261344

Handle: https://hdl.handle.net/20.500.11797/imarina9261344

Authors:  Osorio, Antonio; Zhang, Mimi

Abstract:
In this paper, we propose three novel emissions tax mechanisms aimed at minimizing economic losses, incentivizing green R&D investments and reducing environmental emissions in a sustainable manner. We merge industrial organization theory and contests theory into a new model to explore the implication of three contest mechanisms of endogenous emissions taxation (i.e., the output contest mechanism, the green R&D investment contest mechanism, and the net emission contest mechanism), in which firms compete in terms of production and green R&D investments in order to pay less taxes. In this context, in order to identify the optimal mechanism, we compare several economic performance indicators like carbon neutrality, total production, emission level, green R&D investment, consumer and producer surplus, welfare, and value added to society. We find that the net emission contest mechanism is the best to achieve carbon neutrality, maximize green R&D investments and minimize emissions in situations or industries in which the environmental damages are moderate to relatively large. However, in situations or industries in which the environmental damages are relatively small, the green R&D investment contest mechanism could be the best.