Environmental policy of renewable energy industry under open conditions

Abstract

Renewable energy has two environmental externalities: one is the positive externality as an alternative to fossil energy consumption; the other is the negative externality with its production process consuming fossil energy. If the domestic renewable energy products export to foreign country with not only generating but importing renewable energy, what the environmental policy of both domestic and foreign governments should be? To this end, this paper establishes a renewable energy trade model of the two countries having only one firm for each other. Under the Cournot competition, the results show: first, if the two governments have no cooperation, the best environmental policy for domestic government would be taxation, but not necessarily the Pigouvian tax; foreign government not only impose on foreign manufacturer equal to pollution marginal damage, but also subsidize it over the marginal revenue of renewable energy; Second, if the two governments cooperate, the joint pollution tax is Pigouvian tax equal to the marginal damage of total pollution emissions, while joint subsidy is higher than the marginal revenue of total renewable energy.