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Technology choice and environmental regulation under asymmetric information

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  • D’Amato, Alessio
  • Dijkstra, Bouwe R.

Abstract

We focus on the incentives of an industry with a continuum of small firms to invest in a cleaner technology under two environmental policy instruments: tradable emission permits and emission taxation. We assume asymmetric information, in that the firms’ abatement costs with the new technology are either high or low. Environmental policy is set either before the firms invest (commitment) or after (time consistency). Under commitment, the welfare comparison follows a modified Weitzman rule, featuring reverse probability weighting for the slope of the marginal abatement cost curve. Both instruments can lead to under- or overinvestment ex post. Tradable permits lead to less than optimal expected new technology adoption. Under time consistency, the regulator infers the cost realization and implements the full-information social optimum.

Suggested Citation

  • D’Amato, Alessio & Dijkstra, Bouwe R., 2015. "Technology choice and environmental regulation under asymmetric information," Resource and Energy Economics, Elsevier, vol. 41(C), pages 224-247.
  • Handle: RePEc:eee:resene:v:41:y:2015:i:c:p:224-247
    DOI: 10.1016/j.reseneeco.2015.05.001
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    Cited by:

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    3. Leal, Mariel & Garcia, Arturo & Lee, Sang-Ho, 2018. "The Timing Of Environmental Tax Policy With A Consumer-Friendly Firm," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 59(1), pages 25-43, June.
    4. Alfred Endres & Tim Friehe & Bianca Rundshagen, 2020. "Diffusion and adoption of advanced emission abatement technology induced by permit trading," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1313-1337, September.
    5. García, Arturo & Leal, Mariel & Lee, Sang-Ho, 2018. "Time-inconsistent environmental policies with a consumer-friendly firm: Tradable permits versus emission tax," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 523-537.
    6. Nikula Harri, 2020. "Instrument choice in the case of multiple externalities," Working Papers 2028, Tampere University, School of Management and Business, Economics.
    7. Alessio D’Amato & Bouwe R. Dijkstra, 2018. "Adoption incentives and environmental policy timing under asymmetric information and strategic firm behaviour," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(1), pages 125-155, January.
    8. Ian A. MacKenzie, 2015. "Prices versus quantities with distributional rent seeking," Discussion Papers Series 548, School of Economics, University of Queensland, Australia.
    9. Tang, Bao-Jun & Wang, Xiang-Yu & Wei, Yi-Ming, 2019. "Quantities versus prices for best social welfare in carbon reduction: A literature review," Applied Energy, Elsevier, vol. 233, pages 554-564.
    10. Pichler, Paul & Sorger, Gerhard, 2018. "Delegating climate policy to a supranational authority: a theoretical assessment," European Economic Review, Elsevier, vol. 101(C), pages 418-440.
    11. Maogang Tang & Ruihan Zhang & Zhen Li & Baijun Wu, 2021. "Assessing the impact of tradable discharge permit on pollution reduction and innovation: micro-evidence from Chinese industrial enterprises," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(11), pages 16911-16933, November.
    12. Jun Rentschler & Raimund Bleischwitz & Florian Flachenecker, 2018. "On imperfect competition and market distortions: the causes of corporate under-investment in energy and material efficiency," International Economics and Economic Policy, Springer, vol. 15(1), pages 159-183, January.
    13. Xiaoyan Wang & Minggao Xue & Lu Xing, 2018. "Market-based pollution regulations with damages Varying across space: When the adoption of clean Technology is socially optimal," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 8(1), pages 1-5.
    14. Xu, Lili & Lee, Sang-Ho, 2018. "Environmental policies with excess burden of taxation in free-entry mixed markets," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 1-13.
    15. Sungwan Hong & Seung-Gyu Sim, 2018. "Inelastic Supply of Fossil Energy and Competing Environmental Regulatory Policies," Sustainability, MDPI, vol. 10(2), pages 1-17, January.
    16. Nikula Harri, 2020. "Voluntary opt-in provision and instrument choice in environmental regulation," Working Papers 2027, Tampere University, School of Management and Business, Economics.
    17. Sim, Seung-Gyu & Hong, Sungwan, 2020. "Technology licensing and environmental policy instruments: Price control versus quantity control," Resource and Energy Economics, Elsevier, vol. 62(C).
    18. Florian Habermacher & Paul Lehmann, 2020. "Commitment Versus Discretion in Climate and Energy Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(1), pages 39-67, May.
    19. Paul Pichler & Gerhard Sorger, 2016. "The value of commitment and delegation for the control of greenhouse gas emissions," Vienna Economics Papers vie1604, University of Vienna, Department of Economics.
    20. Iwata, Hiroki, 2020. "Effects of competition forms and market structure on green innovation incentives," MPRA Paper 99305, University Library of Munich, Germany.
    21. Ian A. MacKenzie, 2017. "Rent creation and rent seeking in environmental policy," Public Choice, Springer, vol. 171(1), pages 145-166, April.

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    More about this item

    Keywords

    Asymmetric information; Commitment; Time consistency; Abatement technology; Emission taxation; Tradable emission permits;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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