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Environmental policy and incentives to adopt abatement technologies under endogenous uncertainty

Federico Boffa, Stefano Clo () and Alessio D'Amato ()

No 5, Working Papers from Department of the Treasury, Ministry of the Economy and of Finance

Abstract: 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.

Keywords: carbon tax; cap and trade; technology adoption; endogenous uncertainty (search for similar items in EconPapers)
JEL-codes: L5 O33 Q58 (search for similar items in EconPapers)
Pages: 27
Date: 2013-04
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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