Environmental regulation and technology innovation,” Chapter 1 of unpublished Ph.D. thesis, “Topics of market-based environmental policy.” MIT

Using two-period models, we compare innovation incentives at the industry level offered by five environmental policy nstruments: emissions standards, grandfathered marketable permits, auctioned permits, taxes, and subsidies. Unlike previous literature, we show that a “command-and-control ” instrument such as emissions standards may offer more incentive than do any of the other four “market-based ” instruments. One reason is that permits markets are subject to a “negative spillover effect ” in that aggregate private incentives are lower than total benefits of the innovation. On the other hand, since costs savings from innovations are convex, emission standards far off from the least-cost allocation can lead to higher aggregate cost savings. However, as the degree of heterogeneity in industry’s innovation opportunities i cr ases market-based instruments are more likely to provide more incentives. Our results also indicate that all four market-based instruments provide the same incentives under a competitive setting and equal aggregate reductions across instruments