Working Paper: NBER ID: w16303
Authors: Charles D. Kolstad
Abstract: This paper develops a simple model of a polluting industry and an innovating firm. The polluting industry is faced with regulation and costly abatement. Regulation may be taxes or marketable permits. The innovating firm invests in R&D and develops technologies which reduce the cost of pollution abatement. The innovating firm can patent this innovation and use a licensing fee to generate revenue. In a world of certainty, the first best level of innovation and abatement can be supported by either a pollution tax or a marketable permit. However, the returns to the innovator from innovation are not the same under the two regimes. A marketable permit system allows the innovator to capture all of the gains to innovation; a tax system involves sharing the gains of innovation between the innovator and the polluting industry.
Keywords: Innovation; Pollution; Regulation; Cap-and-Trade; Emissions Tax
JEL Codes: L51; Q55; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pollution tax (Q52) | innovation (O35) |
| pollution tax (Q52) | pollution abatement (Q52) |
| marketable permit system (Q27) | innovation (O35) |
| marketable permit system (Q27) | pollution abatement (Q52) |
| marketable permit system (Q27) | innovators capture all gains (O36) |
| pollution tax (Q52) | gains shared with polluting industry (Q52) |
| marketable permit system (Q27) | efficient outcomes (D61) |
| pollution tax (Q52) | efficient outcomes (D61) |
| both regulatory instruments (optimal design) (D47) | same level of innovation (O39) |
| both regulatory instruments (optimal design) (D47) | same level of pollution abatement (Q52) |