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A Note On Environmental Policy And Innovation When Governments Cannot Commit

It is widely accepted that one of the most important characteristics of an effective climate policy is to provide firms with credible incentives to make long-run investments in R&D that can drastically reduce emissions. Recognizing that a government may be tempted to revise its policy design after innovations become available, this note shows how the performance of two policy instruments - prices (uniform taxes) and quantities (tradable pollution permits) - differ in such a setting. The author also discusses the gains from combining either instrument with subsidies to adopting firms.

Provided by: Pontificia Universidad Catolica de Chile Topic: Innovation Date Added: Mar 2011 Format: PDF

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