Grantee Research Project Results
1998 Progress Report: Carbon Abatement Policies and Technological Innovation
EPA Grant Number: R826153Title: Carbon Abatement Policies and Technological Innovation
Investigators: Parry, Ian , Toman, Michael A. , Pizer, Billy , Fischer, Carolyn
Current Investigators: Parry, Ian , Pizer, Billy , Fischer, Carolyn
Institution: Resources for the Future
EPA Project Officer: Chung, Serena
Project Period: October 1, 1997 through September 30, 2000
Project Period Covered by this Report: October 1, 1997 through September 30, 1998
Project Amount: $240,000
RFA: Exploratory Research - Social Science (1997) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The objective of this project is to explore how endogenous technological change affects the appropriate choice among, and design of, environmental policy instruments, with a particular focus on carbon abatement policies.Progress Summary:
This fiscal year we focused on completing the paper AInstrument Choice for Environmental Protection when Technological Innovation is Endogenous,@ and an earlier paper APollution Regulation and the Efficiency Gains from Technological Innovation.@ Work also was initiated on two new papers.The paper "Instrument Choice for Environmental Protection when Technological Innovation is Endogenous" is coauthored by Carolyn Fischer, Ian Parry, and William Pizer of Resources for the Future. The 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 focus on emissions taxes and both free (grandfathered) and auctioned emissions permits. The paper shows 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 depend crucially on the ability to appropriate innovation rents, 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 empirically small. This is more likely when firms anticipate that policies will be adjusted over time in response to innovation. In short, there is no clear-cut case for preferring one policy instrument over another.
The paper builds on earlier literature in a number of respects. First, it provides a quantitative comparison of policy instruments. This is important for identifying the circumstances when there can be significant welfare discrepancies between the policy instruments and whereCfor practical purposesCthese discrepancies are unimportant. Previous studies (with the exception of Parry [1998], which is discussed below) have been theoretical and, therefore, do not explore whether the differences between policies are significant or not. Second, the analysis focuses on welfare effects, that is, it ranks policies on innovation benefits net of the costs of innovation. In contrast, most previous studies rank policies according to how much innovation they might induce; however, it is important to look at welfare. For example, in some cases, we find that emissions taxes induce the highest amount of innovation, but the net gain to society can be lowest. Third, the paper provides a more rigorous treatment of the technology adoption decision at noninnovating firms. In particular, we allow for noninnovating firms to have the option of choosing alternative technologies to the new innovation (such as imitations of the new innovation). This modeling extension is important and crucially affects the relative incentives for innovation under auctioned permits.
Parry's earlier paper, "Pollution Regulation and the Efficiency Gains from Technological Innovation," uses analytical models and simulations to demonstrate two main points. First, prior studies suggest a preference for emissions taxes over (nonauctioned) emissions permits and performance standards based on their potential for promoting technological innovation. This paper casts some doubt on the empirical importance of this assertionCit shows that the welfare gain induced by an emissions tax is significantly larger than that induced by other policies only in the case of very major innovations. Second, the paper also finds that the presence of technology spillovers per se does not necessarily imply large inefficiencies. In part, this is because competition for a given amount of innovation rent can be excessive and this tends to offset, to some extent, the inadequate incentives due to imperfect appropriation of innovation rents. Thus, despite spillovers, the welfare gain from additional policies to promote innovation (such as R&D subsidies) may be limited.
Future Activities:
In fiscal year 1999, we plan to work on two papers. The first paper will attempt to pin down under what sorts of circumstances there is a Alarge@ welfare gain from promoting R&D into cleaner production technologies, relative to the static welfare gains from environmental regulations that usually are the focus of a cost/benefit analysis. This will provide a rough guide for policymakers, indicating when technological change should be an important consideration in the design of environmental policies. We expect our results to depend on a number of key parameters including the assumed discount rate, the rate of decay of pollution in the environment, and the level of environmental benefits (relative to abatement costs). The second paper will extend our earlier analysis to allow for the accumulation of emissions in the environment, as is the case for carbon dioxide. This introduces a number of important policy issues that we plan to address, including how innovation affects the cost-minimizing dynamic path of emissions control and whether R&D should be "bunched" in earlier periods or smoothed out over time.Journal Articles on this Report : 1 Displayed | Download in RIS Format
Other project views: | All 13 publications | 3 publications in selected types | All 3 journal articles |
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Type | Citation | ||
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Parry IWH. Pollution regulation and the efficiency gains from technological innovation. Journal of Regulatory Economics 1998;14(3):229-254. |
R826153 (1998) R826153 (1999) R826153 (2000) R826153 (Final) |
Exit Exit |
Supplemental Keywords:
carbon abatement, air emissions, policy, endogenous technological innovation, efficiency impacts, dynamic optimization., RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, decision-making, Economics & Decision Making, Social Science, air pollution policy, carbon emissions, clean technologies, technical innovation, dynamic optimization, decision making, endogenous technical change, cost of pollution abatement, environmental policy, Research and Development, carbon abatement policies, compliance costs, public policy, benefits assessment, cost effectivenessRelevant Websites:
http://www.rff.org/proj_summaries/1998.htmProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.