In this paper we analyze a dynamic Cournot oligopoly to study the relationship between competition and green innovation. Firms face a tax on emissions and react to this tax investing in an abatement technology. The tax is given by the feedback Stackelberg equilibrium of a dynamic policy game between a regulator and a polluting oligopoly where environmental damages depend on the pollution stock. For constant marginal damages, we find that firms’ R&D investment increases monotonically with the number of firms in the industry because competition increases the tax. This effect is explained by the fact that the tax can be decomposed in two terms, one negative that reflects the divergence between the price and the marginal revenue because of the market power of firms, and another positive that reflects the divergence between the social valuation of the pollution stock and the private valuation. When the number of firms in the industry increases, the absolute value of the first term decreases and the tax increases, leading to more investment. Moreover, as in this case firms increase their stock of abatement capital, net emissions decrease causing a reduction of the pollution stock.
