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How Important is Technological Innovation in Protecting the Environment?

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  • Parry, Ian

    ()
    (Resources for the Future)

  • Pizer, William

    ()
    (Resources for the Future)

  • Fischer, Carolyn

    ()
    (Resources for the Future)

Abstract

Economists have speculated that the welfare gains from technological innovation that reduces the future costs of environmental protection could be a lot more important than the "Pigouvian" welfare gains over time from correcting a pollution externality. If so, then a primary concern in the design of environmental policies should be the impact on induced innovation, and a potentially strong case could be made for additional instruments such as research subsidies. This paper examines the magnitude of the welfare gains from innovation relative to the discounted Pigouvian welfare gains, using a dynamic social planning model in which research and development (R&D) augments a knowledge stock that reduces future pollution abatement costs. We find that the discounted welfare gains from innovation are typically smaller....and perhaps much smaller....than the discounted Pigouvian welfare gains. This is because the long-run gain to innovation is bounded by the maximum reduction in abatement costs and, since R&D is costly, it takes time to accumulate enough knowledge to substantially reduce abatement costs. Only in cases when innovation substantially reduces abatement costs quickly (by roughly 50% within 10 years) and the Pigouvian amount of abatement is initially modest, can the welfare gains from innovation exceed the welfare gains from pollution control. These results apply for both flow and stock pollutants, and for linear and convex environmental damage functions. Our results suggest that spurring technological innovation should not be emphasized at the expense of achieving the optimal amount of pollution control. More generally, our results appear to have implications for a broad range of policy issues. They suggest that the welfare gains from innovation that reduces the costs of supplying any public good (defense, crime prevention, infrastructure, etc.) may be fairly small relative to those from providing the optimal amount of the public good over time.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-00-15.

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Date of creation: 01 Mar 2000
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Handle: RePEc:rff:dpaper:dp-00-15

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  1. Parry, Ian W H, 1998. "Pollution Regulation and the Efficiency Gains from Technological Innovation," Journal of Regulatory Economics, Springer, vol. 14(3), pages 229-54, November.
  2. 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.
  3. 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.
  4. 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.
  5. Stavins, Robert, 1998. "Market-Based Environmental Policies," Discussion Papers dp-98-26, Resources For the Future.
  6. Parry, Ian & Pizer, William & Fischer, Carolyn, 1998. "Instrument Choice for Environmental Protection When Technological Innovation is Endogenous," Discussion Papers dp-99-04, Resources For the Future.
  7. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  8. Stavins, Robert & Newell, Richard, 2000. "Abatement-Cost Heterogeneity and Anticipated Savings from Market-Based Environmental Policies," Working Paper Series rwp00-006, Harvard University, John F. Kennedy School of Government.
  9. Orr, Lloyd, 1976. "Incentive for Innovation as the Basis for Effluent Charge Strategy," American Economic Review, American Economic Association, vol. 66(2), pages 441-47, May.
  10. Parry, Ian W. H., 1995. "Optimal pollution taxes and endogenous technological progress," Resource and Energy Economics, Elsevier, vol. 17(1), pages 69-85, May.
  11. 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.
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Cited by:
  1. Tom-Reiel Heggedal & Karl Jacobsen, 2008. "Timing of innovation policies when carbon emissions are restricted: an applied general equilibrium analysis," Discussion Papers 536, Research Department of Statistics Norway.
  2. Tomas Philipson & Stephane Mechoulan, 2003. "Intellectual Property & External Consumption Effects: Generalizations from Pharmaceutical Markets," NBER Working Papers 9598, National Bureau of Economic Research, Inc.
  3. Burtraw, Dallas, 2000. "Innovation Under the Tradable Sulfur Dioxide Emission Permits Program in the U.S. Electricity Sector," Discussion Papers dp-00-38, Resources For the Future.
  4. Tomas Philipson & Stephane Mechoulan & Anupam Jena, 2006. "Health Care, Technological Change, and Altruistic Consumption Externalities," NBER Working Papers 11930, National Bureau of Economic Research, Inc.
  5. Sterner, Thomas & Turnheim, Bruno, 2009. "Innovation and diffusion of environmental technology: Industrial NOx abatement in Sweden under refunded emission payments," Ecological Economics, Elsevier, vol. 68(12), pages 2996-3006, October.

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