Profiting From Regulation: The Effects of Emissions Standards on Abatement R&D

ABSTRACT This paper explores the impact of emissions standards on a firm's output and abatement R&D investment decisions in a duopoly model, extending the work of Amir et al. (2023). It is shown that high upper limits on total emissions remove the firms' incentives to invest in abatement R&D. This helps firms to coordinate on profit‐increasing output levels relative to unregulated markets. Moreover, subsidies for abatement R&D may hurt firms, but improve welfare when the regulation is strict enough.