Environmental policies with variable pollution intensity in a differentiated oligopoly

For this study, to examine optimal environmental policy, pollution intensity is measured to depend positively on an environmental index such as temperature. Great increases in temperature might cause greater damage to an economy even when production processes are unchanged. This presumption implies that optimal environmental policy varies with the environmental index. Pollution intensity increases with an observable index. Findings indicate that, under certain conditions, the degree of internalization of environmental damage by environmental policy decreases at small indexes, but it increases at higher indexes, that is, the internalization degree of the environmental tax has a U-shape with respect to the index. Optimal environmental policy tolerates environmental damage for more consumption of goods at lower pollution intensities, but it depresses production of goods for less environmental damage at higher pollution intensities. Environmental awareness leads policy to become more eco-friendly for higher environmental indexes, although preferences for product differentiation have the opposite influence.