A dynamic analysis of green R&D and environmental tax in the digital economy era

We develop a differential game model to investigate the green R&D efforts of industrial firms under a data economy. Data can be used by firms to improve production efficiency, but the production activities of firms will generate pollution as a side product. Thus, an environmental tax can be adopted by the government to control pollution and maximize social welfare. Interestingly, we find that the relationship between data economy and pollution can be either positive or negative, depending on the relative importance of data for industrial firms adopting digital technologies. In fact, as digital technology progresses, data can serve as an important factor of production that either substitutes or complements capital investment of firms, and this will then greatly affect the incentive for firms to make green R&D efforts for pollution control purposes. As a result, it is suggested that the government should carefully consider the impacts of data economy and optimally adjust the environmental tax.