Paper: arXiv 2402.16401

Authors: Felix Dammann, Giorgio Ferrari

Abstract

This paper proposes and analyzes a stationary equilibrium model for a competitive industry which endogenously determines the carbon price necessary to achieve a given emission target. In the model, firms are identified by their level of technology and make production, entry, and abatement decisions. Polluting firms are subject to a carbon price and abatement is formulated as an irreversible investment, which entails a sunk cost and results in the firms switching to a carbon neutral technology. In equilibrium, we identify a carbon price and a stationary distribution of incumbent, polluting firms, that guarantee the compliance with a certain emission target. Our general theoretical framework is complemented with a case study with Brownian technology shocks, in which we discuss some implications of our model. We observe that a carbon pricing system alongside installation subsidies and tax benefits for green firms trigger earlier investment, while higher income taxes for polluting firms may be distorting. Moreover, we discuss the role of a welfare maximizing regulator, who, by optimally setting the emission target, may mitigate or revert some parameters’ effects observed in the model with fixed limit.

Complexity vs Empirical Score

  • Math Complexity: 8.0/10
  • Empirical Rigor: 2.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper presents a rigorous theoretical general equilibrium framework using optimal stopping and Brownian technology shocks to model green technology adoption and endogenous carbon pricing. However, it lacks empirical validation against real-world emissions and market data, relying instead on a stylized theoretical case study.

Research Flowchart

  flowchart TD
    A[Research Goal: Endogenous Carbon Price for Target Emission Reduction] --> B[Model Inputs: Technology Levels, Sunk Costs & Brownian Shocks]
    B --> C[Methodology: Stationary Equilibrium & Irreversible Green Investment]
    C --> D[Computational Optimization: Regulated Carbon Pricing & Tax Policies]
    D --> E[Key Outcome 1: Carbon Price & Firm Distribution Guaranteeing Target]
    D --> F[Key Outcome 2: Subsidies Accelerate Adoption; High Taxes Can Distort]
    D --> G[Key Outcome 3: Optimal Regulator Target Mitigates Policy Distortions]

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0 of 73 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.