Optimality of emission pricing policies based on emission intensity targets under imperfect competition

This study proposes an emission-intensity-based emission tax as a policy solution for negative environmental externality in oligopoly markets. Emissions are taxed when firms' intensities exceed their target level. We show that even under imperfect competition, this pricing leads to the first-best outcome. The optimal rate is equal Pigovian tax. principle can also apply tradable permits traded based on intensity targets.