Green Technology Choice under Environmental Taxes

This paper studies the impact of environment taxes and market competition on firms' choices of a clean technology. Specifically, we model two profit-maximizing firms competing with each other in a duopoly market where the firms charge the same price and face a common price-dependent demand. The firms play a two-stage game in the following sequence. In the first stage (technology game), the firms choose from two available technologies which differ in environmental emissions as well as in the fixed and variable costs. In the second stage (production game), depending on the technology choices, firms simultaneously choose optimal production quantities, given an exogenous environmental tax rate set by a regulator. We show that a priori symmetrical duopolist may choose the same or different technologies, depending on the tax rate and other parameters, and clean and normal technologies may coexist in equilibrium. Contrary to common belief, switching to the clean technology is not always a best response to an increase in the tax rate. We find that the firms' reaction to an increase in the tax rate may be non-monotone. We also show that the tax rate range for both firms to adopt clean technology is narrower than that in the monopoly case, which suggests that the regulator needs to be more precise in setting tax rate to motivate all firms to switch to the clean technology when there exist competition.