Environmental policies in a Stackelberg differential game

Author:

Cerqueti Roy12ORCID,Correani Luca3,Di Dio Fabio4

Affiliation:

1. Department of Social and Economic Sciences Sapienza University of Rome Rome Italy

2. GRANEM University of Angers Angers SFR CONFLUENCES France

3. Department of Economics and Business University of Tuscia Viterbo Italy

4. Joint Research Centre European Commission Ispra Italy

Abstract

AbstractWe develop a Stackelberg differential game to analyze the economic effects of the reduction plan through two policy instruments, tradable permits and taxes on emissions. Emissions are a by‐product of firm output. The authority acts as a Stackelberg leader, able to set the optimal instrument's level in the light of a finite‐horizon environmental target. We show that the optimal solution of the game is dynamically consistent. Moreover, optimal environmental policies substantially impact the level and composition of economic activity. The differentiation between “clean” and “dirty” firms allows us to assess distributional effects and how environmental technology may influence the game's outcome. Results are shown to be robust under different parameterizations.

Publisher

Wiley

Subject

Management Science and Operations Research,Ocean Engineering,Modeling and Simulation

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