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

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  • Marc, GERMAIN

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Vincent, VAN STEENBERGHE

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 as 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 curvedoes not necessarily decrease with the level of innovation. As a consequence, previous analyses lead to misleading policy recommendations

Suggested Citation

  • 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.
    • Handle: RePEc:ctl:louvec:2005052
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    References listed on IDEAS

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    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.
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    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.

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