Background:

A desirable property of the different environmental regulatory instruments is that they incentivize the adoption of cleaner abatement technologies. It is natural to assume that stricter regulatory policies incentivize a higher adoption of such technologies. Nonetheless, it has been shown that, under perfect competition, this is not always true.

Methodology:

This article offers a theoretical study of the incentives of three different environmental regulatory instruments (taxes, tradable permits and emission standards), on the adoption of a new abatement technology for a Cournot oligopoly.

Results:

As in perfect competition, if the marginal abatement cost curves of both technologies cross and the firms have different adoption costs, it is possible that high taxes, few tradable permits and a small emission standard (strict policies) discourage the adoption of new technologies.

Conclusions:

When choosing a regulatory instrument, it is important to take into account the structure of the available abatement technologies. Otherwise, instead of incentivizing the use of cleaner technologies, the regulator might do the opposite if the policies are too strict.