Environmental Regulation Design: Motivating Firms’ Clean Technology Investments With Penalties and Subsidies
研究预算受限的监管者如何最优地组合罚款和补贴，以激励企业投资清洁技术，并分析市场竞争强度对监管效果的影响。
The recently enacted Inflation Reduction Act (IRA) includes a number of incentive-based programs (e.g., tax credits) designed to motivate firms to develop new clean technologies for fighting climate change. However, the IRA also includes a fee firms incur for excessive methane emissions. This represents the first time the United States government has ever levied a fee on greenhouse gas emissions, and it raises an interesting research question—how should a budget-constrained regulator balance the use of both incentive and penalty-based levers for stimulating investment in clean technology development? In this paper, we examine a regulator’s optimal penalty and subsidy decisions for motivating firms to invest in clean technology development. We illustrate how the level of competitive intensity in the market can influence a budget-constrained regulator with multiple competing objectives—the environment, firm profits, and consumer welfare. We find that a subsidy is always beneficial, irrespective of the regulator’s objective. While imposing a firm penalty always benefits the environment, it always negatively impacts the sum of firm profits and consumer welfare. However, depending on the level of competition in the market, instances can occur where imposing a high penalty actually benefits total firm profits or consumer welfare (separately). Interestingly, a regulator that cares about all three dimensions of its objective equally, should always set the penalty to either its minimum or maximum value, depending on whether the environmental cost of the harmful product is high or low.