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Environmental policy and incentives to adopt abatement technologies under endogenous uncertainty

  • Federico Boffa
  • Stefano Clò
  • Alessio D'Amato

We compare a carbon tax and a cap and trade mechanism in their propensity to induce carbon-reducing technological adoption, when investments are undertaken under uncertainty. In our setting, risk-neutral firms affect the variance and the correlation of the shocks they are exposed to through their technological choice,making uncertainty endogenous. We find that uncertainty associated with a given technology always impacts expected profits under a carbon tax, while under a cap and trade this is the case only as long as the shocks are not correlated across the firms; if,instead, shocks are perfectly correlated,uncertainty has no impact on profits. As a result, we show that, while under a carbon tax, initially symmetric firms tend to have symmetric strategies in equilibrium (either of adoption, or non adoption), a cap and trade system might also induce asymmetric adoption. Finally, we discuss several policy applications of our work, including an analysis of the effects of combining feed-in tariffs with carbon tax or cap and trade.

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Paper provided by Department of the Treasury, Ministry of the Economy and of Finance in its series Working Papers with number 5.

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Length: 27
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:itt:wpaper:2013-5
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