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Market-based instruments and technology choices: a synthesis

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  • Raphael Calel
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    Abstract

    Market-based instruments are widely used to encourage innovation and investmentin cleaner technologies. Using a simple analytical framework and graphical representations, this paper provides a theoretical synthesis of the relationship between emissions prices/taxes and the firm’s optimal technology choice. This unified treatment incorporates the insights of a wide theoretical literature, as well as providing several new findings. Most surprisingly, perhaps, we identify circumstances in which a higher price of emissions actually reduces the incentive for investment in abatement technologies. We discuss the implications for environmental policy. The main conclusion is that a price on emissions invariably affects the type of abatement technologies firms invest in, so that the technological side of emissions abatement must always be considered in tandem with the design of the market-based instrument itself.

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    Bibliographic Info

    Paper provided by Grantham Research Institute on Climate Change and the Environment in its series Grantham Research Institute on Climate Change and the Environment Working Papers with number 57.

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    Date of creation: Aug 2011
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    Handle: RePEc:lsg:lsgwps:wp57

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    17. Juan-Pablo Montero, 2002. "Market Structure and Environmental Innovation," Documentos de Trabajo 215, Instituto de Economia. Pontificia Universidad Católica de Chile..
    18. Kennedy, Peter W. & Laplante, Benoit, 1995. "Equilibrium incentives for adopting cleaner technology under emissions pricing," Policy Research Working Paper Series 1491, The World Bank.
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