Environmental policy in vertical chains with endogenous technology portfolio

Abstract

We analyze the impact of environmental policy in a supply chain where an upstream monopolist uses a mixed portfolio, consisting of a polluting and a green technology. We examine and compare a no-intervention benchmark, a green subsidy, an abatement tax, a mandatory green standard, and a combined policy (mandatory standard and tax), where policy instruments maximize welfare. Compared to the benchmark, prices are higher (lower), total output is smaller (larger), green capacity is larger, polluting capacity, profits, and consumer surplus are smaller (larger), and social welfare is greater with a binding tax (with a subsidy). A subsidy leads to larger green capacity than a tax and, unless the damage is high enough, to lower polluting capacity and greater welfare. A mandatory standard is outcome equivalent to a subsidy, except for the upstream manufacturer, who strictly prefers the latter. For small enough damage, a combined policy benefits not only society, but also consumers and retailers relative to the benchmark.