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Optimal Environmental Policy under Monopolistic Provision of Clean Technologies

  • Hattori, Keisuke

In this paper, we characterize optimal environmental policy in a case where innovation in clean production technologies is developed and provided by a monopoly. Two policy instruments are considered: an emission tax on downstream polluting firms and an R& D subsidy for an upstream innovator in clean technologies. We find that (i) a higher emission tax may increase (decrease) R&D investment when the burden of the tax payment in the polluters' marginal costs and the price-elasticity of the demand for polluting goods are rather small (large), (ii) the social optimum can be achieved by the combined implementation of an emission tax that is smaller than an ex-ante Pigouvian rate and a subsidy that is equal to the rate of emission reduction due to the new technology, and (iii) if the policy instrument is limited to the emission tax, the second-best tax rate lies between the first-best rate and the ex-ante Pigouvian rate. We test our model by numerical simulation and demonstrate the possibility of a type of ``double dividend'' due to the emission tax. Three extensions of the model are then considered: Cournot competition in the polluting industry, a subsidy to polluters who adopt the new technology, and technology spillovers.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28837.

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Date of creation: 30 Jan 2011
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Handle: RePEc:pra:mprapa:28837
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  1. Lanjouw, Jean Olson & Mody, Ashoka, 1996. "Innovation and the international diffusion of environmentally responsive technology," Research Policy, Elsevier, vol. 25(4), pages 549-571, June.
  2. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
  3. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
  4. Maia David & Bernard Sinclair-Desgagné, 2004. "Environmental Regulation and the Eco-industry," CIRANO Working Papers 2004s-42, CIRANO.
  5. Parry, Ian W. H., 1995. "Optimal pollution taxes and endogenous technological progress," Resource and Energy Economics, Elsevier, vol. 17(1), pages 69-85, May.
  6. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  7. Grischa Perino, 2010. "Technology Diffusion with Market Power in the Upstream Industry," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(4), pages 403-428, August.
  8. Denicolo, Vincenzo, 1999. "Pollution-Reducing Innovations under Taxes or Permits," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 184-99, January.
  9. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-48, July.
  10. 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.
  11. Adam Jaffe & Richard Newell & Robert Stavins, 2002. "Environmental Policy and Technological Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(1), pages 41-70, June.
  12. Frondel, Manuel & Horbach, Jens & Rennings, Klaus, 2004. "End-of-Pipe or Cleaner Production? An Empirical Comparison of Environmental Innovation Decisions Across OECD Countries," ZEW Discussion Papers 04-82, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  13. Maia David & Bernard Sinclair-Desgagné, 2010. "Pollution Abatement Subsidies and the Eco-Industry," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 45(2), pages 271-282, February.
  14. Fischer, Carolyn & Newell, Richard G., 2008. "Environmental and technology policies for climate mitigation," Journal of Environmental Economics and Management, Elsevier, vol. 55(2), pages 142-162, March.
  15. David, Maia & Nimubona, Alain-Désiré & Sinclair-Desgagné, Bernard, 2011. "Emission taxes and the market for abatement goods and services," Resource and Energy Economics, Elsevier, vol. 33(1), pages 179-191, January.
  16. Joan Canton & Antoine Soubeyran & Hubert Stahn, 2008. "Environmental Taxation and Vertical Cournot Oligopolies: How Eco-industries Matter," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(3), pages 369-382, July.
  17. Till Requate, 2005. "Timing and Commitment of Environmental Policy, Adoption of New Technology, and Repercussions on R&D," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 175-199, 06.
  18. Simpson, R. David & Bradford, Robert III, 1996. "Taxing Variable Cost: Environmental Regulation as Industrial Policy," Journal of Environmental Economics and Management, Elsevier, vol. 30(3), pages 282-300, May.
  19. Alistair Ulph & David Ulph, 2007. "Climate change—environmental and technology policies in a strategic context," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(1), pages 159-180, May.
  20. 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.
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