Carbon Taxation, Environmental Regulation, Collusion and Competition: An Advanced Game-Theoretic Model

Carbon taxation has become a central policy instrument in modern environmental economics, designed to internalize the negative externalities of greenhouse gas emissions and align economic activity with climate sustainability. Traditional regulatory approaches often fail to account for firms’ strategic behavior in oligopolistic markets, where competition, collusion, and innovation decisions are interdependent. Therefore, a rigorous analytical framework is required to examine how carbon taxes reshape firm incentives, market outcomes, and environmental performance within these strategic contexts. This study develops an advanced game-theoretic model that integrates Cournot competition with environmental regulation and carbon taxation. The model captures both competitive and collusive market structures and introduces abatement decisions as endogenous strategic variables. Firms simultaneously choose production quantities and emission abatement levels under the influence of a per-unit carbon tax. The analysis derives closed-form Nash–Cournot equilibria, collusive outcomes, and welfare implications, considering heterogeneity in costs, emission intensities, and abatement technologies. The findings reveal that carbon taxation increases firms’ marginal costs, leading to lower output and emissions while encouraging cleaner technology adoption. When tax revenues are recycled toward environmental projects or household rebates, both social welfare and political acceptance improve. The model further demonstrates that carbon taxes can either destabilize or reinforce collusion depending on cost asymmetries and discount factors in repeated interactions. These results highlight the dual role of carbon taxation as both an environmental and industrial policy tool. Properly designed tax regimes not only reduce emissions but also influence market structure and competition dynamics. Policymakers should thus balance efficiency, equity, and innovation incentives by integrating carbon taxes with antitrust oversight and targeted revenue recycling.