Carbon emission controls and optimal carbon related regulation in oligopoly: Examination of policy effects on competitiveness and entry deterrence

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Carbon related taxation is viewed as a cost-effective price instrument to charge for greenhouse gas emissions, creating certainty costs for economic agents. The costs will naturally influence the market competitiveness. In this paper, we propose the concept of an equivalent emission standard (EES) tax as a complement to traditional standards, linking the tax rate to the abatement cost for firms under the optimal carbon emission standard and providing tax revenue for the government. To study the optimal carbon related regulation mode and the relevant impacts in oligopoly, we compare four potential carbon related regulations: an emission tax (an emission approach tax), a carbon tax (a fuel approach tax), an emission standard and an EES tax. Incorporating a sequential game analysis, we show that policy effects are relevant to the magnitude of carbon pollution and the abatement cost in the short term. In general, the optimal levels of social welfare under emission tax and carbon tax modes are the same. Notably, the EES tax system can not only generate tax revenue but also has a relatively moderate impact on social welfare. If the social damage resulting from carbon emissions is large, the EES tax system will be comparatively more beneficial to society, but the advantage is limited in terms of the relevant abatement cost. In the long term, under certain conditions, excessive firm entry may occur. As a result, carbon related regulation can be an indirect instrument of entry deterrence in the market.