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Prof. Augustin Landier
Professor of Finance
HEC Paris

We study the interaction between firms, which can invest in green technologies, and government, which can impose emission caps but has limited commitment power. Two types of equilibria can arise: In a “green equilibrium”, firms anticipate caps and invest in green technologies. These investments have positive spillover effects, thus making the government willing to cap emissions. In a “brown equilibrium”, firms anticipate no caps, don’t invest, and the government finds it too costly to cap emissions. A market for emission rights does not eliminate the “brown equilibrium”. A large fund has impact by ensuring that the green equilibrium is selected.