The licensing of eco-technology under emission taxation: Fixed fee vs. auction

•We investigate emission taxation on innovator's licensing strategies for eco-technology and welfare consequences.•We show that licensing strategy depends not only on the emission tax but also the production cost gap of polluting firms.•We show that non-exclusive licensing is preferred to exclusive licensing when the emission tax or cost gap is small.•We show that exclusive auction (fixed fee) licensing is preferred when the cost gap is intermediate (large).

This paper investigates the effect of emission taxation on outside innovator's licensing strategies for eco-technology and its welfare consequences when duopolistic polluting firms have different production costs and purchase licenses for pollution abatement goods. In the presence of an emission tax, we compare the two types of licensing contract, fixed fee and auction, and show that the preference on licensing strategy depends not only upon the level of the emission tax but also on the production cost gap. Specifically, non-exclusive licensing is preferred to exclusive licensing when the emission tax or cost gap is small, while exclusive auction (fixed fee) licensing is preferred when the cost gap is intermediate (large). We also analyze some important welfare issues and discuss public policies on emission taxation and licensing regulation.