Policy analysis for emission-reduction with green technology investment in manufacturing

Different environmental policies create different incentives for emission reduction. The paper examines the effect of two environmental policies, the emission abatement subsidy and emission tax policies, on a market with manufacturer investment in a green technology to reduce emission. Compared to environmental taxation, the results show that the subsidy policy offers a greater incentive to abate emission and yields higher industry profit. However, regarding social welfare, the subsidy policy leads to lower social welfare and environmental performance than the tax policy when emission is highly damaging to the environment and emission abatement is sufficiently costly. From the industrial perspective, increasing technological efficiency is not necessarily beneficial even if it is costless as the government will adjust the environmental policy accordingly for social welfare optimization, may at the manufacturer's expense. Finally, extensions considering a combined policy (both subsidy and tax), a multiplicative emission cost function, and the problem in a supply chain context are performed to check the robustness of the results.