Rethinking green technology interventions: Strategic motivations under uncertain regulations

Abstract

Governments increasingly rely on industry capability to assess the feasibility of implementing stricter environmental regulations. Rather than passively awaiting their imposition, this trend incentivizes firms to shape future regulations through green activities. To investigates how firms with different cost structures and market power strategically adopt and invest in green technology under uncertain regulations, this paper proposes a three-period game model. The equilibrium outcomes reveal the strategic motivations behind green technology adoption. Specifically, when unit green cost is high, technology-leading firms voluntarily adopt green technology to lobby for stricter regulations, thereby raising rivals’ costs and strengthening their competitive advantage. Conversely, when unit green cost is low, these firms adopt green technology to preempt potential threats from technology-following firms, who could dominate the green market through early adoption. Interestingly, our findings show that green technologies most likely to face industry resistance are not the most expensive, but those with moderate production costs. In such cases, regulatory uncertainty fosters tacit collusion, where competing firms collectively resist green technology adoption to reduce regulation probability and improve profits, even though adoption is economically feasible. To counter this strategic resistance, this paper identifies the most effective intervention mechanisms, such as subsidies or penalties. The results suggest that the optimal intervention strategy differs from the traditional approach of subsidizing high-cost green technologies and penalizing low-cost ones. Instead, it should focus on leveraging firms’ strategic motivations for voluntary green adoption. These insights are vital for governments to design more effective and feasible environmental regulations.