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Optimal Firm Behavior under Environmental Constraints

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  • Raouf Boucekkine
  • Natali Hritonenko
  • Yuri Yatsenko

Abstract

The paper examines the Porter and induced-innovation hypotheses in a firm model where: (i) the firm has a vintage capital technology with two complementary factors, energy and capital ; (ii) scrapping is endogenous; (iii) technological progress is energy-saving and endogenous through purposive R&D investment; (iv) the innovation rate increases with R&D investment and decreases with complexity; (v) the firm is subject to emission quotas which put an upper bound on its energy consumption at any date; (vi) energy and capital prices are exogenous. Balanced growth paths are first characterized, and a comparative static analysis is performed to study a kind of long-term Porter and induced-innovation hypotheses. In particular, it is shown that tighter emission quotas do not prevent firms to grow in the long-run, thanks to endogenous innovation, but they have an inverse effect on the growth rate of profits. Some short-term dynamics are also produced, particularly, to analyze the role of initial conditions and energy prices in optimal firm behaviour subject to environmental regulation. Among numerous results, we show that (i) firms which are historically “small” polluters find it optimal to massively pollute in the short run: during the transition, new and clean machines will co-exist with old and dirty machines in the productive sectors, implying an unambiguously dirty transition; (ii) higher energy prices induce a shorter lifetime for capital goods but they depress investment in both new capital and R&D, featuring a kind of reverse Hicksian mechanism.

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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2008_11.

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Handle: RePEc:gla:glaewp:2008_11

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Keywords: Vintage capital; R&D; Emission quotas; Porter hypothesis; Induced innovation hypothesis; Optimization;

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References

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  1. Chimeli, Ariaster B. & Braden, John B., 2005. "Total factor productivity and the environmental Kuznets curve," Journal of Environmental Economics and Management, Elsevier, vol. 49(2), pages 366-380, March.
  2. Stavins, Robert & Jaffe, Adam & Newell, Richard, 1998. "The Induced Innovation Hypothesis and Energy-Saving Technological Change," Discussion Papers dp-98-12-rev, Resources For the Future.
  3. BOUCEKKINE, Raouf & RUIZ-TAMARIT, José Ramon, . "Special functions for the study of economic dynamics: The case of the Lucas-Uzawa model," CORE Discussion Papers RP -2003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. BOUCEKKINE, Raouf & DE LA CROIX, David & LICANDRO, Omar, 2006. "Vintage capital," CORE Discussion Papers 2006024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Xepapadeas, Anastasios & de Zeeuw, Aart, 1999. "Environmental Policy and Competitiveness: The Porter Hypothesis and the Composition of Capital," Journal of Environmental Economics and Management, Elsevier, vol. 37(2), pages 165-182, March.
  6. Kort, P. & Hartl, R.F. & Veliov, V.M. & Feichtinger, G., 2005. "Capital accumulation under technological progress and learning: a vintage capital approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-154966, Tilburg University.
  7. Feichtinger, Gustav & Hartl, Richard F. & Kort, Peter M. & Veliov, Vladimir M., 2005. "Environmental policy, the porter hypothesis and the composition of capital: Effects of learning and technological progress," Journal of Environmental Economics and Management, Elsevier, vol. 50(2), pages 434-446, September.
  8. Hart, Rob, 2004. "Growth, environment and innovation--a model with production vintages and environmentally oriented research," Journal of Environmental Economics and Management, Elsevier, vol. 48(3), pages 1078-1098, November.
  9. Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1997. "Replacement Echoes in the Vintage Capital Growth Model," Journal of Economic Theory, Elsevier, vol. 74(2), pages 333-348, June.
  10. Malcomson, James M., 1975. "Replacement and the rental value of capital equipment subject to obsolescence," Journal of Economic Theory, Elsevier, vol. 10(1), pages 24-41, February.
  11. Richard R. Nelson & Edmond S. Phelps, 1965. "Investment in Humans, Technological Diffusion and Economic Growth," Cowles Foundation Discussion Papers 189, Cowles Foundation for Research in Economics, Yale University.
  12. Carraro, Carlo & Siniscaico, Domenico, 1994. "Environmental policy reconsidered: The role of technological innovation," European Economic Review, Elsevier, vol. 38(3-4), pages 545-554, April.
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Citations

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Cited by:
  1. Théophile T. Azomahou & Raouf Boucekkine & Phu Nguyen-Van, 2008. "Promoting clean technologies: The energy market structure crucially matters," THEMA Working Papers 2008-19, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Brechet, Thierry & HRITONENKO, Natali & YATSENKO, Yuri, 2010. "Adaptation and mitigation in long-term climate policies," CORE Discussion Papers 2010065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Boucekkine, Raouf & Hritonenko, Natali & Yatsenko, Yuri, 2011. "Scarcity, regulation and endogenous technical progress," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 186-199, March.
  4. AZOMAHOU, Théophile & BOUCEKKINE, Raouf & NGUYEN-VAN, Phu, 2009. "Promoting clean technologies under imperfect competition," CORE Discussion Papers 2009011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Yuri, YATSENKO & Raouf, BOUCEKKINE & Natali, HRITONENKO, 2008. "Estimating the Dynamics of R&D-based Growth Models," Discussion Papers (ECON - Département des Sciences Economiques) 2008034, Université catholique de Louvain, Département des Sciences Economiques.

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