Firms’ production and green technology strategies: The role of emission asymmetry and carbon taxes

Firms in major polluting industries have different carbon intensities. The degree of emission asymmetry varies in different industries. In some industries, the carbon intensity of some firms may be several times higher than that of others. Yet surprisingly, emission asymmetry has been largely ignored in the literature. In this paper, we adopt a game-theoretical framework that incorporates emission asymmetry with a carbon tax and imperfect competition. We show that emission asymmetry plays a key role in shaping firms’ production and investment decisions toward green technologies. Due to emission asymmetry, among other factors, a carbon tax does not necessarily induce the adoption of green technology. Nevertheless, upon the introduction of a carbon tax, the carbon-inefficient firm is more likely to benefit from the green technology than the carbon-efficient firm because the green technology can mitigate or even eliminate the initial emission asymmetry. This might be an important driver for firms to further invest in new technology to have an edge over their rivals. One particularly compelling insight is that besides social welfare, industry profit may also improve upon the introduction of a carbon tax if it is properly enacted. Our findings therefore provide renewed support for alleviation of the economic concerns of governments as well as businesses and the general public about the impact of tightening environmental regulations. Policymakers may also foster green technology through well-designed carbon regulations.