THE EFFECT OF WEATHER SHOCKS AND A STRATEGIC INVESTOR ON COMPETITION AND ABATEMENT EFFORTS UNDER ENVIRONMENTAL REGULATION

Yazeed Rashed Aldhafian

doi:10.7273/000006507

The first chapter investigates how weather shocks that affect firm costs induce different output and abatement decisions. We find that imposing an emissions fee on the polluting firm reduces its output and increases its investments in abatement, while the output of its clean rival increases. When the polluting firm faces severe weather shocks, the emissions fee becomes less stringent; in contrast, when the clean firm faces severe weather shocks, the emissions fee becomes more stringent if environmental damages are relatively large. While we show that regulation is unambiguously welfare improving, our findings indicate a U-shaped relationship between welfare under regulation and the efficiency of the abatement efforts. The second chapter investigates the impact of strategic investors on competition and abatement in energy markets. Under a monopoly market with a polluting company, the presence of strategic investors increases investments in abatement, decreases emissions fees, and increases total outputs with lower environmental damage in comparison to markets with no strategic investors when abatement is relatively efficient. In addition, the relationship between social welfare with regulation and abatement efficiency indicates a U-shaped relationship. Under a Cournot market, the presence of strategic investors increases investments in abatement, decreases emissions fees, and increases total outputs with lower environmental damage even if abatement is relatively costly. Interestingly, as the opportunity cost of investing in both firms increases, strategic investors decrease their investments in both firms. And as the opportunity cost continues to increase, investors further decrease their investment in the polluting firm while start to increase their investment in the clean firm. The third chapter considers weather shocks that affect both consumers and firms, and its influence on competition and abatement efforts in a Cournot duopoly with a clean and a polluting firm. We find that emission fees effectively decrease the polluting firm's output while encouraging investment in abatement efforts. The cleaner firm gains from the decrease in its competitor's output. Furthermore, weather shocks on the polluting firm negatively impact emissions fees and investment in abatement. Conversely, shocks on the clean firm have a positive impact on both emissions fees and investment in abatement when damage severity is relatively large. Additionally, weather shocks affecting consumers increase the output of both firms along with emission fees and abatement. Importantly, regulation improves social welfare, highlighting its advantages over an unregulated environment. Our findings indicate a U-shape relationship between abatement efficacy and welfare under regulation.

THE EFFECT OF WEATHER SHOCKS AND A STRATEGIC INVESTOR ON COMPETITION AND ABATEMENT EFFORTS UNDER ENVIRONMENTAL REGULATION

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