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Instrument choice for environmental protection when technological innovation is endogenous

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  • Fischer, Carolyn
  • Parry, Ian W. H.
  • Pizer, William A.

Abstract

This paper presents an analytical and numerical comparison of the welfare impacts of alternative instruments for environmental protection in the presence of endogenous technological innovation. We analyze emissions taxes and both auctioned and free (grandfathered) emissions permits. We find that under different sets of circumstances each of the three policies may induce a significantly higher welfare gain than the other two policies. In particular, the relative ranking of policy instruments can crucially depend on the ability of adopting firms to imitate the innovation, the costs of innovation, the slope and level of the marginal environmental benefit function, and the number of firms producing emissions. Moreover, although in theory the welfare impacts of policies differ in the presence of innovation, sometimes these differences are relatively small. In fact, when firms anticipate that policies will be adjusted over time in response to innovation, certain policies can become equivalent. Our analysis is simplified in a number of respects; for example, we assume homogeneous and competitive firms. Nonetheless, our preliminary results suggest there is no clear-cut case for preferring any one policy instrument on the grounds of dynamic efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 45 (2003)
Issue (Month): 3 (May)
Pages: 523-545

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Handle: RePEc:eee:jeeman:v:45:y:2003:i:3:p:523-545

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Web page: http://www.elsevier.com/locate/inca/622870

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References

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  1. Parry, Ian W. H., 1995. "Optimal pollution taxes and endogenous technological progress," Resource and Energy Economics, Elsevier, vol. 17(1), pages 69-85, May.
  2. Zvi Griliches, 1992. "The Search for R&D Spillovers," NBER Working Papers 3768, National Bureau of Economic Research, Inc.
  3. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
  4. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
  5. Jaffe Adam B. & Stavins Robert N., 1995. "Dynamic Incentives of Environmental Regulations: The Effects of Alternative Policy Instruments on Technology Diffusion," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S43-S63, November.
  6. Wright, Brian Davern, 1983. "The Economics of Invention Incentives: Patents, Prizes, and Research Contracts," American Economic Review, American Economic Association, vol. 73(4), pages 691-707, September.
  7. Stavins, Robert, 1998. "Market-Based Environmental Policies," Discussion Papers dp-98-26, Resources For the Future.
  8. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
  9. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Biglaiser, Gary & Horowitz, John K, 1995. "Pollution Regulation and Incentives for Pollution-Control Research," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(4), pages 663-84, Winter.
  11. M. Ishaq Nadiri, 1993. "Innovations and Technological Spillovers," NBER Working Papers 4423, National Bureau of Economic Research, Inc.
  12. Bohm, Peter & Russell, Clifford S., 1985. "Comparative analysis of alternative policy instruments," Handbook of Natural Resource and Energy Economics, in: A. V. Kneeseā€  & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 1, chapter 10, pages 395-460 Elsevier.
  13. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
  14. Magat, Wesley A., 1978. "Pollution control and technological advance: A dynamic model of the firm," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 1-25, March.
  15. Robison, H David, 1985. "Who Pays for Industrial Pollution Abatement?," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 702-06, November.
  16. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
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  1. > Environmental and Natural Resource Economics > Climate economics > Policy instruments
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