We show that the imposition of a Markovian tax on emissions, that is, a tax rate which depends on the pollution stock, can induce stable cartelization in an oligopolistic polluting industry. This does not hold for a uniform tax. Thus, accounting for the feedback effect that exists within a dynamic framework, where pollution is allowed to accumulate into a stock over time, changes the result obtained within a static framework. Moreover, the cartel formation can diminish the welfare gain from environmental regulation such that welfare under environmental regulation and collusion of firms lies below that under a laissez-faire policy.
Benchekroun, H., & Ray Chaudhuri, A. (2011). Environmental policy and stable collusion: The case of a dynamic polluting oligopoly. Journal of Economic Dynamics and Control, 35(4), 479-490. https://doi.org/10.1016/j.jedc.2010.12.003