Instrument Choice for Environmental Protection When Technological Innovation Is Endogenous

Carolyn Fischer, Ian Parry and William Pizer

No 10812, Discussion Papers from Resources for the Future

Abstract: This paper presents an analytical and numerical comparison of the welfare impacts of alternative instruments for environmental protection in the presence of endogenous technological innovation. We analyze emissions taxes and both auctioned and free (grandfathered) emissions permits. We find that under different sets of circumstances each of the three policies may induce a significantly higher welfare gain than the other two policies. In particular, the relative ranking of policy instruments can crucially depend on the ability of adopting firms to imitate the innovation, the costs of innovation, the slope and level of the marginal environmental benefit function, and the number of firms producing emissions. Moreover, although in theory the welfare impacts of policies differ in the presence of innovation, sometimes these differences are relatively small. In fact, when firms anticipate that policies will be adjusted over time in response to innovation, certain policies can become equivalent. Our analysis is simplified in a number of respects; for example, we assume homogeneous and competitive firms. Nonetheless, our preliminary results suggest there is no clear-cut case for preferring any one policy instrument on the grounds of dynamic efficiency.

Keywords: Environmental; Economics; and; Policy (search for similar items in EconPapers)
Pages: 32
Date: 1998
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Journal Article: Instrument choice for environmental protection when technological innovation is endogenous (2003)
Working Paper: Instrument Choice for Environmental Protection When Technological Innovation is Endogenous (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:rffdps:10812

DOI: 10.22004/ag.econ.10812

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