Foreign Cross‐Ownership and Environmental Policies in a Vertically Mixed Market: Tax Versus Standard

We investigate the impact of foreign vertical ownership on two environmental policies—an emission tax and an emission standard—in a mixed duopoly setting. The results show that in a mixed duopoly, regardless of whether foreign vertical ownership is forward or backward, an emission tax is optimal when marginal environmental damage is low; otherwise, an emission standard prevails. Moreover, under the optimal policy, upstream foreign firms and downstream private firms consistently favor forming backward ownership. However, compared to the absence of foreign vertical ownership, this endogenously formed backward ownership does not always enhance social welfare.