IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/2005076.html
   My bibliography  Save this paper

Innovation under taxes versus permits: how a commonly made assumption leads to misleading policy recommendations

Author

Listed:
  • GERMAIN, Marc
  • VAN STEENBERGHE, Vincent

Abstract

The literature on the impact of economic instruments (typically taxes and tradable permits) on the level of innovation is usually based on the assumption that innovation reduces the slope of the marginal abatement cost curve. This assumption, which usually leads to the conclusion that taxes induce higher levels of innovation than tradable permits, is however never motivated. In this short article, we analyse the assumption by introducing innovation in the production function of a polluting firm and by showing how it affects the corresponding marginal abatement cost curve. We show that the slope of the marginal abatement cost curve does not necessarily decrease with the level of innovation. As a consequence, previous analyses lead to misleading policy recommendations.

Suggested Citation

  • GERMAIN, Marc & VAN STEENBERGHE, Vincent, 2005. "Innovation under taxes versus permits: how a commonly made assumption leads to misleading policy recommendations," LIDAM Discussion Papers CORE 2005076, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2005076
    as

    Download full text from publisher

    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2005.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
    2. 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.
    3. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
    4. Adam Jaffe & Richard Newell & Robert Stavins, 2002. "Environmental Policy and Technological Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 41-70, June.
    5. McKitrick, Ross, 1999. "A Derivation of the Marginal Abatement Cost Curve," Journal of Environmental Economics and Management, Elsevier, vol. 37(3), pages 306-314, May.
    6. 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.
    7. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rabah Amir & Marc Germain & Vincent Van Steenberghe, 2008. "On the Impact of Innovation on the Marginal Abatement Cost Curve," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(6), pages 985-1010, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marc, GERMAIN & Vincent, VAN STEENBERGHE, 2005. "Innovation under taxes versus permits : how a commonly made assumption leads to misleading recommendations," Discussion Papers (ECON - Département des Sciences Economiques) 2005052, Université catholique de Louvain, Département des Sciences Economiques.
    2. Baker, Erin & Clarke, Leon & Shittu, Ekundayo, 2008. "Technical change and the marginal cost of abatement," Energy Economics, Elsevier, vol. 30(6), pages 2799-2816, November.
    3. Rabah Amir & Marc Germain & Vincent Van Steenberghe, 2008. "On the Impact of Innovation on the Marginal Abatement Cost Curve," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(6), pages 985-1010, December.
    4. Stavins, Robert & Jaffe, Adam & Newell, Richard, 2000. "Technological Change and the Environment," Working Paper Series rwp00-002, Harvard University, John F. Kennedy School of Government.
    5. Martin Larsson, 2017. "EU Emissions Trading: Policy-Induced Innovation, or Business as Usual? Findings from Company Case Studies in the Republic of Croatia," Working Papers 1705, The Institute of Economics, Zagreb.
    6. Parry, Ian W H & Pizer, William A & Fischer, Carolyn, 2003. "How Large Are the Welfare Gains from Technological Innovation Induced by Environmental Policies?," Journal of Regulatory Economics, Springer, vol. 23(3), pages 237-255, May.
    7. Fischer, Carolyn & Newell, Richard G., 2005. "Environmental and Technology Policies for Climate Change and Renewable Energy," Discussion Papers 10789, Resources for the Future.
    8. Parry, Ian W.H., 2003. "On the implications of technological innovation for environmental policy," Environment and Development Economics, Cambridge University Press, vol. 8(1), pages 57-76, February.
    9. Dagmar Nelissen & Till Requate, 2007. "Pollution-reducing and resource-saving technological progress," International Journal of Agricultural Resources, Governance and Ecology, Inderscience Enterprises Ltd, vol. 6(1), pages 5-44.
    10. 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.
    11. Mehdi Fadaee & Luca Lambertini, 2015. "Non-tradeable pollution permits as green R&D incentives," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 17(1), pages 27-42, January.
    12. Adam Jaffe & Richard Newell & Robert Stavins, 2002. "Environmental Policy and Technological Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 41-70, June.
    13. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2003. "Chapter 11 Technological change and the environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 11, pages 461-516, Elsevier.
    14. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
    15. Dongdong Li, 2022. "Dynamic optimal control of firms' green innovation investment and pricing strategies with environmental awareness and emission tax," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(4), pages 920-932, June.
    16. Lehmann, Paul, 2008. "Using a policy mix for pollution control: A review of economic literature," UFZ Discussion Papers 4/2008, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    17. Erin Baker, 2009. "Optimal Policy under Uncertainty and Learning about Climate Change: A Stochastic Dominance Approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(5), pages 721-747, October.
    18. Popp, David & Newell, Richard G. & Jaffe, Adam B., 2010. "Energy, the Environment, and Technological Change," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 873-937, Elsevier.
    19. Baker, Erin & Adu-Bonnah, Kwame, 2008. "Investment in risky R&D programs in the face of climate uncertainty," Energy Economics, Elsevier, vol. 30(2), pages 465-486, March.
    20. Adam B. Jaffe & Richard G. Newell & Robert N. Stavins, 2004. "Technology Policy for Energy and the Environment," NBER Chapters, in: Innovation Policy and the Economy, Volume 4, pages 35-68, National Bureau of Economic Research, Inc.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2005076. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alain GILLIS (email available below). General contact details of provider: https://edirc.repec.org/data/coreebe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.