Optimal Environmental Policy under Monopolistic Provision of Clean Technologies

Hattori, Keisuke (2011): Optimal Environmental Policy under Monopolistic Provision of Clean Technologies.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Environmental Tax; R&D; Environmental Damages; Patent
• Subjects: L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q55 - Technological Innovation; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q53 - Air Pollution ; Water Pollution ; Noise ; Hazardous Waste ; Solid Waste ; Recycling; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy

References

Arrow, K., 1962. Economic welfare and the allocation of resources for invention, in: Nelson, R. (Eds.), The Rate and Direction of Inventive Activity: Economic and Social Factors. Princeton University Press, Princeton, pp. 609-626.

Canton, J., Soubeyran, A., Stahn, H., 2008. Environmental taxation and vertical Cournot oligopolies: How eco-industries matter. Environmental and Resource Economics 40, 369-382.

David, M., Sinclair-Desgagné, B., 2005. Environmental regulation and the eco-industry. Journal of Regulatory Economics 28, 141-155.

David, M., Sinclair-Desgagné, B., 2010. Pollution abatement subsidies and the eco-industry. Environmental and Resource Economics 45, 271-282.

David, M., Nimubona, A-D., Sinclair-Desgagné, B., 2011. Emission taxes and the market for abatement goods and services. Resource Energy Economics 33, 179-191.

Denicolò, V., 1999. Pollution-reducing innovations under taxes or permits. Oxford Economic Papers 51, 184-199.

Downing P., White, L., 1986. Innovation in pollution control. Journal of Environmental Economics and Management 13, 81-29.

Ebert, U., 1992. Pigouvian taxes and market structure: The case of oligopoly and different abatement technologies. Finanzarchiv 49, 154-166.

EIEP, 2000. The Carbon Tax to Reduce GHGs Emission. Report to the Study Group on Economic Instruments in Environmental Policies.

Fischer, C., Parry, I., Pizer, W., 2003. Instrument choice for environmental protection when technological innovation is endogenous. Journal of Environmental Economics and Management 45, 523-545.

Fischer, C., Newell, R., 2008. Environmental and technology policies for climate mitigation. Journal of Environmental Economics and Management 55, 142-162.

Frondel, M., Horbach, J., Rennings, K., 2007. End-of-pipe or cleaner production? An empirical comparison of environmental innovation decisions across OECD countries, Business Strategy and the Environment 16, 571-58.

Jaffe, A., Newell, R., Stavins, R., 2002. Environmental policy and technological change. Environmental and Resource Economics 22, 41-69.

Katsoulacos, Y., Xepapadeas, A., 1996. Environmental innovation, spillovers and optimal policy rules, in: Carraro, C., Katsoulacos, Y., Xepapadeas A. (Eds.), Environmental Policy and Market Structure. Kluwer, Boston, pp. 143-150.

Kneese, A., Schultz, C., 1975. Pollution, Price and Public Policy, Brookings Institution, Washington.

Lanjouw, J., Mody, A., 1996. Innovation and the international diffusion of environmentally responsive technology. Research Policy 25, 549-71.

Milliman, S., Prince, R., 1989. Firm incentives to promote technological change in pollution control. Journal of Environmental Economics and Management 17, 247-265.

Montero, J., 2002. Permits, standards, and technology innovation. Journal of Environmental Economics and Management 44, 23-44.

OECD, 2006. The Political Economy of Environmentally Related Taxes. OECD, Paris.

Parry, I., 1995. Optimal pollution taxes and endogenous technological progress. Resource and Energy Economics 17, 69-85.

Pearce, D., 1991. The role of carbon taxes in adjusting to global warming. Economic Journal 101, 938-48.

Perino, G., 2010. Technology diffusion with market power in the upstream industry. Environmental and Resource Economics 46, 403-428.

Petrakis, E., Xepapadeas, A., 1999. Does government precommitment promote environmental innovation? in: Petrakis, E., Sartzetakis, E., Xepapadeas, A. (Eds.), Environmental Regulation and Market Power: Competition, Time Consistency and International Trade. Edward Elgar Publishing, Northanpton, pp. 147-161.

Requate, T., 2005a. Dynamic incentives by environmental policy instruments -- a survey. Ecological Economics 54, 175-195.

Requate, T., 2005b. Timing and commitment of environmental policy, adoption of new technology, and repercussions on R\&D. Environmental and Resource Economics 31, 175-199.

Requate, T., 2006. Environmental policy under imperfect competition. In: Tietenberg, T., Folmer, H. (Eds.), The International Yearbook of Environmental And Resource Economics 2006/2007: A Survey of Current Issues. Edward Elgar Publishing, Cheltenham, pp. 120-207.

Simpson, R., Bradford III, R., 1996. Taxing variable cost: Environmental regulation as industrial policy. Journal of Environmental Economics and Management 30, 282-300.

Ulph, D., 1997. Environmental policy and technological innovation. in: Carraro, C., Siniscalco, D. (Eds.), New Directions in the Economic Theory of the Environment. Cambridge University Press, Cambridge, pp. 43-68.

Ulph A., Ulph, D., 2007. Climate change -- Environmental and technology policies in a strategic context. Environmental and Resource Economics 37, 159-180.

UNEP, EPO, and ICTSD, 2010. Patents and clean energy: bridging the gap between evidence and policy, http://www.unep.org/greeneconomy/Portals/30/docs/patents_clean_energy.pdf.