Optimal Carbon Tax Scheme under Uncertainty in an Oligopolistic Market of Polluters

  • Andreas Welling


Carbon taxation is used by several countries to internalize the negative effects of carbon emissions to the emitters of carbon. In this article the effects of a carbon tax on an oligopolistic market of polluters are analyzed. With the help of a multi-criteria optimization model the optimal carbon tax rate is determined; first under certainty and then in presence of demand uncertainty. It is shown that demand uncertainty leads to a lower optimal carbon tax rate, while it simultaneously increases carbon emissions. Finally, the influence of a possible carbon emission reducing investment is analyzed with the help of a real option model.