Incentives for Technological Development: BAT Is BAD
This paper examines the effect of environmental regulation on a firm’s incentives to invest in developing cheaper (clean-up) technologies in a model where consumers are willing to pay for environmentally clean technologies. It focuses on two types of policies: a BAT based policy and a commitment policy. In the former policy, the standard is based on the best available technology (BAT) where the regulator re-optimizes environmental regulation in response to new technologies. However, under a commitment policy, the regulator announces a regulation and sticks to it irrespective of the firm’s adopted technology. The paper finds that cleaner technologies are not adopted if the regulator announces a BAT based policy. A commitment policy not only leads to positive investment in research and development but is also welfare improving. Copyright Springer 2005
Volume (Year): 30 (2005)
Issue (Month): 3 (03)
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