To Abate, or Not to Abate? The Arising of the Win–Win Solution Under Time Consistent Emission Taxation

We analyse a model of environmental regulation where two firms can optimally decide to invest in an emission abatement technology and the regulator taxes firms’ emissions in a time-consistent manner. Depending on the values of the parameters measuring the extent of emission abatement that firms may achieve and the degree of product differentiation, we characterize the subgame perfect equilibria, developing all admissible scenarios where either both firms invest in abatement technologies, none of them do, or just one does, and show the conditions under which a win-win solution emerges, validating a strong form of Porter hypothesis. We also extend the main result to the oligopoly game with a generic number of firms.