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Market-based instruments and technology choices: a synthesis

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  • Raphael Calel

Abstract

Market-based instruments are widely used to encourage innovation and investmentin cleaner technologies. Using a simple analytical framework and graphical representations, this paper provides a theoretical synthesis of the relationship between emissions prices/taxes and the firm�s optimal technology choice. This unified treatment incorporates the insights of a wide theoretical literature, as well as providing several new findings. Most surprisingly, perhaps, we identify circumstances in which a higher price of emissions actually reduces the incentive for investment in abatement technologies. We discuss the implications for environmental policy. The main conclusion is that a price on emissions invariably affects the type of abatement technologies firms invest in, so that the technological side of emissions abatement must always be considered in tandem with the design of the market-based instrument itself.

Suggested Citation

  • Raphael Calel, 2011. "Market-based instruments and technology choices: a synthesis," GRI Working Papers 57, Grantham Research Institute on Climate Change and the Environment.
  • Handle: RePEc:lsg:lsgwps:wp57
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    Cited by:

    1. Perino, Grischa & Requate, Till, 2012. "Does more stringent environmental regulation induce or reduce technology adoption? When the rate of technology adoption is inverted U-shaped," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 456-467.
    2. Bonilla, Jorge & Coria, Jessica & Mohlin, Kristina & Sterner, Thomas, 2014. "Diffusion of NOx abatement technologies in Sweden," Working Papers in Economics 585, University of Gothenburg, Department of Economics.

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