Emission caps and investment in green technologies

To the extent that firms don't internalise the negative externalities oftheir CO2 emissions, government intervention is needed to curb globalwarming. We study the equilibrium interaction between firms, which caninvest in green technologies, and government, which can impose\ emissioncaps but has limited commitment power. Two types of equilibria can arise: Iffirms anticipate caps, they invest in green technologies. These investmentshave positive spillover effects, lowering the aggregate cost of emissionreductions for all firms, thus making the government willing to capemissions. If firms anticipate no caps, they don't invest in greentechnologies, and the government finds it too costly to cap emissions. Alarge fund, engaging with firms' management to foster investment in greentechnologies, can tilt equilibrium towards emission caps