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Non-tradeable pollution permits as green R&D incentives

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  • Mehdi Fadaee
  • Luca Lambertini

Abstract

Profit-seeking firms can be induced to internalise the environmental damages caused by production via several policy instruments, a widely used one being emission permits. In a very influential paper, Laffont and Tirole (J Public Econ 62:127–140, 1996 ) point out that the allocation of pollution rights to firms may hinder their willingness to undertake uncertain R&D projects for environmental friendly technologies. We revisit this issue in a duopoly model, showing that a lottery allocating a given volume of emission rights exclusively to the winner might indeed be used by the regulator to spur the introduction of green technologies at least by the loser and, if properly designed, by the entire industry, in an admissible range of the model parameters. We also show that there exist parameter constellations wherein firms’ incentives are aligned with social ones. Copyright Springer Japan 2015

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  • Mehdi Fadaee & Luca Lambertini, 2015. "Non-tradeable pollution permits as green R&D incentives," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 17(1), pages 27-42, January.
    • Handle: RePEc:spr:envpol:v:17:y:2015:i:1:p:27-42
    DOI: 10.1007/s10018-014-0082-1
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    2. Wang, Xu & Zhang, Xiao-Bing & Zhu, Lei, 2019. "Imperfect market, emissions trading scheme, and technology adoption: A case study of an energy-intensive sector," Energy Economics, Elsevier, vol. 81(C), pages 142-158.

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    More about this item

    Keywords

    Environmental externalities; Pollution rights; Pollution-reducing innovation; L13; O31; Q55;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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