Niklas Schoch (Sciences-Po Paris)
Industry decarbonisation remains a major challenge to reduce greenhouse gas emissions. The most polluting industries are typically characterised by market concentration. This paper investigates the welfare implications of carbon pricing in concentrated industries when firms can adopt emissions-saving technologies. I show that the optimal carbon tax level must balance output suppression with sufficient incentives to adopt available green technologies. To quantify this trade-off, I develop a dynamic model of imperfect competition and endogenous production technology choice, using recent developments in the modelling of dynamic continuous investment choices. I estimate the model using data from the French cement industry, exploiting a detailed dataset on low-carbon investments and the recent escalation in the EU carbon price to estimate abatement investment costs. This allows me to simulate investment and industry paths under varying levels of a carbon tax and technology cost subsidies. This allows me to simulate investment and industry paths under varying levels of a carbon tax and technology cost subsidies. In this setting, the welfare-maximising carbon tax lies between the level implied by a static oligopoly analysis and the Pigouvian level. This reflects the trade-off between further output suppression (Buchanan-critique) and sufficient incentives for green investments. In addition, I show that the combination of tax and subsidy provides sufficient investment incentives without triggering a strong output contraction from excessive taxation. As a consequence, I find supplementing the statically optimal tax with a technology cost subsidy yields a modest welfare gain above what the optimal tax alone can achieve.