An optimal combination of emissions tax and green innovation subsidies for polluting oligopolies

Governments around the world have adopted a series of policies and instruments to mitigate climate warming, environmental pollution, and other issues that affect human survival and development. Among them, emission taxes are levied to regulate manufacturers' emission reductions, and subsidies are used to encourage green innovation. However, so far, little attention has been paid to the mechanism of the impact of joint tax-subsidy policies on green innovation and the design of optimal tax-subsidy policies. To fill this gap, this paper develops a Stackelberg differential game model between a regulator and a polluting oligopoly. In this model, the regulator firstly issues a joint tax-subsidy policy, and then the pollution oligopoly determines the level of green innovation effort in the light of the regulator's policy. In particular, for the first time, both efficiency-improving and cost-reducing learning by doing in green innovation are considered simultaneously. The results show that the joint tax-subsidy policy can lead to higher social welfare and higher investment levels in green innovation than a single tax or subsidy policy. Moreover, learning-by-doing in green innovation can substitute part of the innovation investment, while improving environmental quality and social welfare, especially under the joint tax-subsidy policy. As a result, a joint tax-subsidy policy needs to be adopted and dynamically adjusted to different implementation contexts. (C) 2020 Elsevier Ltd. All rights reserved.

Automated summary

This paper develops a Stackelberg differential game model between a regulator and a polluting oligopoly to study the impact of joint tax-subsidy policies on green innovation. The results suggest that joint tax-subsidy policy can increase social welfare and investment levels in green innovation, while learning-by-doing in green innovation can improve environmental quality and social welfare.