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A note on environmental policy and innovation when governments cannot commit

  • Montero, Juan Pablo

It is widely accepted that one of the most important characteristics of an effective pollution control policy is to provide firms with credible incentives to make long-run investments in R&D that can drastically reduce pollution. Recognizing that a government may be tempted to revise its policy design after innovations become available, this note shows how the performance of two policy instruments—prices (uniform taxes) and quantities (tradeable pollution permits)—differ in such a setting. I also discuss the gains from combining either instrument with subsidies to adopting firms.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 33 (2011)
Issue (Month): S1 ()
Pages: S13-S19

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Handle: RePEc:eee:eneeco:v:33:y:2011:i:s1:p:s13-s19
DOI: 10.1016/j.eneco.2011.07.022
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. J-J. Laffont & J. Tirole, 1994. "Pollution Permits and Compliance Strategies," Working papers 95-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.
  3. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
  4. David Popp & Richard G. Newell & Adam B. Jaffe, 2009. "Energy, the Environment, and Technological Change," NBER Working Papers 14832, National Bureau of Economic Research, Inc.
  5. Laffont, J.J. & Tirole, J., 1995. "Pollution Permits and Environmental Innovation," Papers 95.396, Toulouse - GREMAQ.
  6. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  8. 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.
  9. Stavins, Robert, 2001. "Experience with Market-Based Environmental Policy Instruments," Discussion Papers dp-01-58, Resources For the Future.
  10. Preston McAfee, 2003. "Capacity Choice Counters the Coase Conjecture," Theory workshop papers 505798000000000046, UCLA Department of Economics.
  11. Suzanne Scotchmer, 2011. "Cap-and-Trade, Emissions Taxes, and Innovation," Innovation Policy and the Economy, University of Chicago Press, vol. 11(1), pages 29 - 54.
  12. Juan-Pablo Montero, 2006. "A simple auction mechanism for the optimal allocation of the commons," Working Papers 0608, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  13. Montero, Juan-Pablo, 2002. "Permits, Standards, and Technology Innovation," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 23-44, July.
  14. Carrión-Flores, Carmen E. & Innes, Robert, 2010. "Environmental innovation and environmental performance," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 27-42, January.
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