Climate policy and innovation in the absence of commitment

Article Type

Research Article

Publication Title

Journal of the Association of Environmental and Resource Economists

Abstract

We compare the effects of price and quantity instruments (an emissions tax and a quota with tradable permits) on the incentive to innovate to reduce the cost of an emission-free technology. We assume that the government cannot commit to the level of a policy instrument before R&D occurs but sets the level to be socially optimal after the results of R&D are realized. The equivalence of price and quantity instruments in inducing innovation that is seen in end-of-pipe abatement models does not hold. When the marginal cost of the dirty technology is constant, then a quota can induce R&D, but a tax is completely ineffective. However, if the marginal cost function of the dirty technology is steep enough, then both a tax and a quota with tradable permits can induce R&D, and the tax will do so in a wider range of circumstances. Furthermore, in this case, an R&D subsidy may induce R&D and raise welfare whether a tax or a quota regime is in place.

First Page

917

Last Page

955

DOI

10.1086/688510

Publication Date

12-1-2016

Comments

Open Access; Green Open Access

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