There are important examples of countries which have implemented policies to promote pollution
abatement activities in sectors characterized by some degree of product differentiation. This
paper examines the role of product differentiation on optimal policy and industry emissions in a
Cournot oligopoly model in the presence of abatement efforts, abatement subsidies and emission
taxes. The analysis indicates that as products become more differentiated the government can afford
a tax increase due to the presence of subsidies and abatement efforts. Additionally, highly
differentiated industries may experience a rapid increase in emissions and so policies such as R&D
may be needed to tackle higher emissions. The government adjusts optimal policy as industries
become more or less pollution-intensive, and the extent of the adjustment varies across industries
characterized by different degrees of product differentiation. The analysis is potentially relevant in
industries where firms are taking steps to differentiate their products in order to capture particular
market niches, and lower production and abatement costs.
