Technology adoption under emissions taxes and permit markets with price collars

This study investigates theoretically and experimentally firm-level adoption and market-level diffusion incentives of cost-saving abatement technology in price-collared emissions markets. Our theoretical model shows that the degree of technology diffusion in an industry comprising heterogeneous firms depends on both the position and width of the price collar. The model admits markets without price controls and emissions taxes as special cases, enabling unambiguous rankings of how alternative policies affect technology diffusion. We also implement a laboratory market experiment to provide empirical tests of these rankings. The experimental results strongly support the theoretical predictions regarding differences in technology adoption and diffusion across policy arrangements. Consistent with the theoretical predictions, firms with higher abatement costs adopt the technology more frequently, permit prices increase with positive shocks to abatement costs, and prices decrease in the degree of technology diffusion.