Investment in environmental innovation with environmental regulation and consumers’ environmental awareness: A dynamic analysis

Abstract

This paper investigates the effects of environmental regulation and consumers’ environmental awareness on the optimal investment strategies of a monopolist’s environmental innovation. We develop a dynamic optimal control model in which two kinds of environmental innovation are considered (i.e., end-of-pipe and cleaner production technologies innovation), and the installed abatement capacity and green performance of the product are state variables. We explore the monopolist’s optimal investment strategies and find that there exists a complementarity or substitutability relationship between the monopolist’s steady-state investments in end-of-pipe and cleaner production technologies innovation, which depends on the value of consumers’ environmental awareness. Further, we consider the optimal investment strategies from the perspective of social planner. By comparing investment strategies under the monopolist and social planner optimum cases, we show that the monopolist can achieve socially optimal innovation investment levels under a given environmental policy. Finally, we relax the assumption of a given policy and characterize the first-best and second-best policies, respectively, then compare R&D incentives of the two policies by numerical examples. We find that the first-best policy generates higher end-of-pipe and cleaner production technologies innovation incentives than the second-best emission tax policy.