Title: Effects on firm decisions considering the temporality of environmental policy

Authors: Felipe Rivera; Katherin López; Jorge Zamorano

Addresses: Faculty of Engineering and Architecture, Universidad Central de Chile, Santiago, Chile ' Department of Industrial Engineering, Universidad de Santiago de Chile, Santiago, Chile ' Department of Industrial Engineering, Program for the Development of Sustainable Production Systems (PDSPS), Universidad de Santiago de Chile, Santiago, Chile

Abstract: This research analyses the effects of the temporality of environmental policy on firms' location and abatement decisions. The policies are implemented by a regulator concerned about the welfare of society and environmental pollution. Therefore, it applies two instruments simultaneously: the tax on emissions, which seeks to internalise environmental costs, and the subsidy to clean technologies, which incentivises their adoption. In addition, the optimal levels of tax and subsidy that maximise social welfare are studied, considering the impact of the timing of the decision (ex-ante or ex-post). As for its resolution, a model of duopolistic firms competing in quantities in an emission-intensive sector is used. Among the main results, it is demonstrated that for both an ex-ante and ex-post implementation, social welfare is enhanced when environmental policies are in place. However, when the tax is applied ex-post and only one company chooses to remain in the local country, environmental damage increases.

Keywords: environmental regulation; temporality of the decision; emission tax; subsidy R&D; location.

DOI: 10.1504/IJSE.2025.145301

International Journal of Sustainable Economy, 2025 Vol.17 No.2, pp.147 - 169

Received: 24 Aug 2023
Accepted: 04 Nov 2023
Published online: 31 Mar 2025 *

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