Timing of adoption of clean technologies by regulated monopolies

Abstract

We consider a monopoly firm producing a good and, at the same time, polluting and using fossil energy. By incurring an investment cost, this firm can adopt a lower production cost clean technology using renewable energy. We determine the optimal adoption date for the firm in the case where it is not regulated at all and in the case where it is regulated at each period. Interestingly, the regulated firm adopts the clean technology earlier than what is socially optimal, as opposed to the nonregulated firm. The regulator can induce the firm to adopt the clean technology at the socially optimal date by a postpone adoption subsidy. Nevertheless, the regulator may be interested in the earlier adoption of the firm to encourage the diffusion of the use of clean technologies in other industries.