Firms’ green technology investment and production strategies under carbon tax uncertainty with heterogeneous adjustment flexibility

This paper examines how uncertainty in carbon tax policy implementation interacts with firms’ flexibility in adjusting green technology investments to shape market equilibrium, social welfare, and environmental outcomes. We develop a Cournot duopoly model in which two profit-maximizing firms compete in quantities, invest in emission-reducing technologies, and face a carbon tax that may or may not be enacted with known probability. We compare two cases — flexible and inflexible investment adjustment — depending on whether firms determine their investment decisions after or before the policy realization. We identify two central mechanisms: the investment enhancement effect and the production expansion effect. Together, these effects lead to lower expected profits but higher expected consumer surplus in the flexible investment adjustment case. Furthermore, we show that the comparison of expected tax revenue and social welfare across the two cases depends critically on the carbon tax rate. Our findings provide theoretical insights into how the interaction between policy uncertainty and operational flexibility shapes strategic firm behavior and determines the effectiveness of carbon tax policies.