Environmental innovation under Cournot competition

In this paper, we address the incentives to invest in environmental innovation of enterprisesthat exercise market power in the output market and also buy and sell pollution permits.Differently from the existing literature, using a market approach we explicitly model theinteraction between the output market, where firms play à la Cournot, and the permitsmarket. We find that, in the new equilibrium firms behave symmetrically, that is, they eitherboth innovate to protect their market share in the output market or they both choose not toinnovate. Whether the innovation equilibrium arises or not depends on the output demandand on the productivity enhancement and not on the distribution of permits among firms.Finally, we show that, under this market configuration, collusion can be welfare enhancing.....