Factors affecting innovation and pollution-reduction performance of environmental regulations

Abstract

The effects of market conditions on output, total discharges, and pollution prevention and pollution control research and development expenditure are investigated under two regulatory tools in the US pulp and paper industry. A two-stage simultaneous Cournot game with a performance standard and a tax on adsorbable organic halides (AOX) is used to analyze the effects of changes in market-demand elasticity, input prices, and asymmetries in abatement and production processes and across scenario comparisons. The findings indicate that these factors affect the research and development portfolio of the firms, total paper production and discharges of pollutants, and compositions of dirty and clean firms. The effects of the factors are also found to be different under the different regulatory tools, a point that suggests sound and effective regulatory design should consider these factors. This study promotes the understanding of how market-specific factors affect the performance of regulatory tools in inducing research and development and reducing pollution. It should also provide a framework for policy designers to analyze economic and environmental behavior of firms in industry-specific regulatory design.