Temporality of environmental policy and its effects on the location and abatement decision

Abstract

This research analyzes the effects of the temporality of environmental policy on firm location and abatement decisions. Environmental policies are implemented by a benevolent regulator who is concerned about the welfare of society and environmental pollution. For this reason, it implements two instruments at the same time: the tax on emissions, which seeks to internalize environmental costs, and the subsidy to clean technologies, which encourages their adoption. In addition, the optimal levels of taxes and subsidies that maximize social welfare are studied, considering the impact of the timing of the decision (ex ante or ex post) on the competitiveness of the market. 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 shown that in an ex post regime, firms prefer to locate in the country that offers a higher subsidy, even when they face higher tax levels compared to the ex ante regime.