Pollution Accumulation and Firm Incentives to Accelerate Technological Change Under Uncertain Private Benefits

The paper explores the relationships between the design of public incentives and the policy-maker's desired timing of abandonment of a polluting technology, when this requires an irreversible private investment and the firm faces uncertain appropriable benefits from the technological change. Two regulatory approaches are examined. Firstly, we consider the quite common one of lowering the private investment cost, through a subsidy, in order to bridge the gap between the private and the policy-maker's desired timing of environmental innovation. Secondly, we consider a policy scenario where the regulator, instead of simply lowering the investment's rental price, also stimulates abandonment of the polluting technology by reducing – through appropriate announcements – the uncertainty surrounding the technological switch's private profitability. We then compare the two approaches and show the latter's benefits, in terms of the policy's effectiveness and/or budgetary savings. Copyright Kluwer Academic Publishers 1997