A one-stage model of abatement innovation in Cournot duopoly: emissions vs performance standards

Amir, Rabah, Gama, Adriana, Lahmandi-Ayed, Rim and Werner, Katarzyna (2023) A one-stage model of abatement innovation in Cournot duopoly: emissions vs performance standards. Environmental Modeling and Assessment. ISSN 1420-2026

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Abstract

This paper evaluates the comparative performance of emission and performance standards in a one-stage game of abatement R&D and Cournot duopoly, in terms of R&D propensity, output and social welfare. For each standard, firms simultaneously select R&D and output levels, given the standard’s exogenous constraint. A performance standard generates higher R&D investments and output, but lower profit, than the pollution-equivalent emissions standard. The same conclusion extends to social welfare only under high demand. We also conduct a similar comparison for each of the two instruments across the one-stage and the two-stage models. The two-stage model leads to higher levels of R&D and industry output for both standards. The same conclusion applies to the social welfare comparison for the emissions standard. However, for the performance standard, the same conclusion requires a damage parameter below a given threshhold. When the standards are chosen to maximize welfare, the performance comparison becomes highly parameter-dependent, except that social welfare is higher for the performance standard. Some policy implications are discussed.