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Incentives for Innovation in Pollution Control: Emission Standards Revisited



Conventional analysis of the economics of environmental policy usually claims that emission taxes induce a stronger incentive for an improvement in pollution abatement technologies compared to emission standards. In contrast, recent empirical studies reveal that there is no systematic relationship between improvements in pollution abatement technologies and the policy instrument chosen. The present paper tries to clarify this contradiction. In the first step the paper shows that the conventional model of innovation in pollution control under different policy regimes is deficient in at least two ways: It neglects policy impacts on the firms’ output level and it assumes a rather unrealistic type of emission standard. In the second step the paper presents a more elaborated model which tries to overcome these shortcomings. Using this model it is shown that the impact on innovation in pollution control caused by taxes and standards strongly depends on the scale of technical progress as well as on the cost structure of the firm under consideration such that there is no unique ranking of the two policies. Finally, the paper discusses the policy implications of these findings.

Suggested Citation

  • Juergen Dietz & Peter Michaelis, 2004. "Incentives for Innovation in Pollution Control: Emission Standards Revisited," Discussion Paper Series 263, Universitaet Augsburg, Institute for Economics.
  • Handle: RePEc:aug:augsbe:0263

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    References listed on IDEAS

    1. M. C. Grimston & V. Karakoussis & R. Fouquet & R. van der Vorst & P. Pearson & M. Leach, 2001. "The European and global potential of carbon dioxide sequestration in tackling climate change," Climate Policy, Taylor & Francis Journals, vol. 1(2), pages 155-171, June.
    2. Peter Michaelis, 2004. "Zum Innovationsanreiz umweltpolitischer Instrumente: Rehabilitierung der Auflagenpolitik?," Discussion Paper Series 259, Universitaet Augsburg, Institute for Economics.
    3. Requate, Till, 1998. "Incentives to innovate under emission taxes and tradeable permits," European Journal of Political Economy, Elsevier, vol. 14(1), pages 139-165, February.
    4. Klevorick, Alvin K. & Levin, Richard C. & Nelson, Richard R. & Winter, Sidney G., 1995. "On the sources and significance of interindustry differences in technological opportunities," Research Policy, Elsevier, vol. 24(2), pages 185-205, March.
    5. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
    6. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
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    More about this item


    emission standards; emission taxes; incentives to innovate;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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