This paper studies the impact of environmental policies when firms can adjust product design as they see fit. In particular, it considers cross relationships between product design dimensions. For example, when products are designed to be more durable, this may add production steps and increase pollutant emissions during production. More generally, changes applied to one dimension can affect the cost or environmental performance of other dimensions. In this theoretical model, a firm interacts with consumers and a regulator. Before the production stage, the firm must choose the levels of three design dimensions: 1) energy performance during production, 2) energy performance during use, and 3) durability. Depending on the assumptions, the dimensions are said to be complementary, neutral, or competitive. The regulator can promote greener designs by applying targeted environmental taxes on emissions during production or consumption. The main results shed light on the consequences of modifying public policies. When some design dimensions are competitive, a targeted emission tax can result in environmental burden shifting, with an overall increase in pollution. This paper also explores the social optimum and the development of second-best policies when some policy instruments are imperfect. Under given conditions, a government would want to regulate and constraint the level of durability.

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