Encouraging the adoption of environmental technologies when the cost of clean-up is uncertain

In a new economic context dominated by the crisis and the recession, direct limitation of greenhouse gas (GHG) emissions using tax or emission permits is more difficult than ever before. As a result, calls for the encouragement of technologies and processes with high emissions-earning potential are emerging. We know from Requate and Unold [2003] that if the regulator is short-sighted and fully aware of the costs of clean-up, then the tax provides a stronger incentive for technological change than the exchange of permits. However, the regulator is often called upon to design pollution control policy in a situation of uncertainty about the cost of pollution control. In such a situation, Roberts and Spence (1976) show that the hybrid tax-permit instrument is economically more efficient in reducing pollution emissions than either the tax alone or the permit alone.In this paper, we study the impact of the uncertainty regarding the cost of clean-up on incentives for technological change. We will be particularly interested in the incentives generated by the regulation of pollution by tax, permits and the hybrid tax-permit system. This incentive is measured by the additional gains realized on the price and the volume of emissions when adopting environmental technology.Keywords. Depollution; Technological incentives; uncertainty; Emission permits; tax