Welfare Enhancing Time Consistent Environmental Policies in fixed-numbers and free-entry Oligopolies

This paper examines how the government's ability to commit, or not, to a specific emission tax level impacts environmental innovation and social welfare in fixed-numbers and free-entry oligopolies. We show that when the market is relatively concentrated, emission taxes are lower, while environmental innovation, profits and welfare are higher, under a time consistent policy than under a precommitment policy. Conversely, when the market concentration is relatively low, the rankings reverse. Furthermore, considering a free-entry oligopoly, we show that there are still conditions under which the time consistent policy fosters higher environmental innovation and social welfare than a precommitment policy, even though the number of firms entering the market are higher under a time consistent emission tax. Therefore, contrary to prevailing beliefs, we show that the government's commitment to a policy may result in higher emissions and lower social welfare.