Climate Policy under Technology Spillovers

We study climate policy when there are technology spillovers between countries, as there is no instrument that (directly) corrects for these externalities. Without an international climate agreement, the (non-cooperative) equilibrium depends on whether countries use tradable quotas or carbon taxes as their environmental policy instruments. All countries are better-off in the tax case than in the quota case. Two types of international climate agreements are then studied: One is a Kyoto type of agreement where each country is assigned a specific number of internationally tradable quotas. In the second type of agreement, a common carbon tax is used domestically in all countries. None of the cases satisfy the conditions for the social optimum. Even if the quota price is equal to the Pigovian level, R&D investments will be lower than what is socially optimal in the quota case. It is also argued that the quota agreement gives higher R&D expenditures and more abatement than the tax agreement.     

Location decisions of a polluting firm and the time consistency of environmental policy

This paper considers location decisions of a monopolist, who faces a tax on its emissions in the home country, under ex post that is, time consistent, and ex ante, that is precommitment, environmental policies. We show that the monopolist will relocate more often under ex post optimal emission taxes. A government which cannot commit to an ex ante emission tax and sets its tax ex post after abatement effort has been chosen, is unable to affect the monopolist’s location decision, because it cannot commit to strategically reduce its tax level in the first stage. Domestic welfare is often higher under ex post emission taxes whenever the monopolist relocates under both policy regimes. Otherwise, welfare is higher under government commitment to an ex ante emission tax level. Thus, government commitment to a policy is not always welfare improving.     

Tax policy endogeneity: evidence from R&D tax credits

This paper estimates the causal effect of research and development (R&D) tax incentives on R&D expenditures using new data on U.S. states. Identifying tax variation comes from changes in federal corporate tax laws that heterogeneously and, due to the simultaneity of state and federal corporate taxes, automatically affect state-level tax laws. Instrumental variables regressions indicate that a 1% increase in R&D tax incentives causes a statistically significant 2.8–3.8% increase in R&D. Alternatively, ordinary least squares (OLS) regressions of R&D expenditures on R&D tax incentives, which do not correct for the policy endogeneity of R&D tax incentives, indicate that a 1% increase in R&D tax incentives causes a statistically insignificant 0.4–0.7% increase in R&D. One possible explanation for these results is that tax policies are implemented before an economic downturn.     

R&D policy in a vertically related industry

In this paper, we analyze the effectiveness of public policy aimed to stimulate business-performed R&D in a vertically related market. We examine the role of an R&D active upstream supplier in a four-stage R&D model, where we incorporate public funding. The considered policy instrument is direct funding of firms’ R&D efforts. We calculate the optimal policies and show that they have a positive impact on firms’ R&D investments. From a welfare point of view, it is optimal to differentiate the subsidy rates between the upstream and the downstream markets. Competition in the product market leads to a higher subsidy rate to the upstream supplier than to the downstream firms. When concentration is high in the downstream market, the optimal solution is an R&D subsidy for these firms, otherwise the optimal solution is an R&D tax for the downstream firms.     

Timing of innovation policies when carbon emissions are restricted: An applied general equilibrium analysis

This paper studies the timing of subsidies for emissions-saving research and development (R&D) and how innovation policy is influenced by a carbon tax. We develop a dynamic computable general equilibrium (CGE) model with both general R&D and specific emissions-saving R&D. We find two results that are important when subsidizing emissions-saving R&D in order to target inefficiencies in the research markets. First, the welfare gain from subsidies is larger when the carbon tax is high. This is because a high carbon tax raises the social value of the emissions-saving technology and that this increase in value is not fully appropriated by the private firms. Secondly, the welfare gain is greater when there is a falling time profile of the rate of subsidies for emissions-saving R&D, rather than a constant or increasing profile. The reason is that knowledge spillovers are larger in early periods.     

International R&D Rivalry with Spillovers and Policy Cooperation in R&D Subsidies and Taxes

Abstract

We have investigated non-cooperative and jointly optimal R&D policies in the framework of Spencer & Brander (1983) in the presence of R&D spillovers. When R&D activities are strategic substitutes and the R&D game exhibits a positive externality, the result of Spencer & Brander (1983) reverses: the non-cooperative policy is a tax while the jointly optimal policy is a subsidy. Moreover, when R&D activities are strategic complements, the usual result of the prisoners' dilemma in the strategic subsidy game does not hold, implying that a welfare intervention is preferable over laissez-faire. When spillovers are sufficiently large, the joint welfare increases with subsidies being higher than those under non-cooperation.     

Pollution Regulation and the Efficiency Gains from Technological Innovation

Previous studies suggest a preference for emissions taxes over (non-auctioned) emissions permits and performance standards based on their potential for promoting technological innovation. We present simulation results that cast some doubt on the empirical importance of this assertion: 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. We also find that the presence of technology spillovers per se does not necessarily imply large inefficiencies. Thus, despite spillovers, the welfare gain from additional policies to promote innovation (such as R&D subsidies) may be limited.     

Corporate Tax Incentives for R&D Investment in OECD Countries

Differentiating internal equity from debt finance, this study examines the generosity of R&D-specific tax incentives in OECD countries based on an NPV model. The corporate tax system generally favours debt finance and some previous findings on the possible preponderance of internal equity for financing R&D investment cannot be explained in relation to R&D-specific tax concessions. The OECD comparison demonstrates that R&D tax allowances adopted in the Czech Republic, Belgium, the UK, Denmark, Hungary, Austria and Australia generated the most substantial tax savings in 2006. Combined with such incentives, the after-tax NPV increases with the corporate tax rate, suggesting stronger investment stimulation through a tax-rate-increase-cum-base-broadening policy.     

Optimal combination of innovation and environmental policies under technology licensing

Under what conditions will a carbon tax encourage environmental innovation? Can a regulator design an optimal environmental policy to reduce emissions and to promote clean technologies? This paper studies optimal environmental policy in the situation where a monopoly innovator develops and licenses clean production technologies to downstream polluting firms. We find that (i) a higher emission tax will encourage innovation when the burden of the tax payment in the polluters' costs and/or the price-elasticity of the demand for polluting goods are small, (ii) the innovation-inducing effects of emission tax are inversely related to the emission-reduction (Pigouvian) effects of the tax, and (iii) the social optimum can be achieved by the mix of tax and subsidy. We also show that if the policy instrument is limited to the tax, the second-best tax rate would lie between the marginal damage and the first-best rate. By performing numerical simulations, we also demonstrate that the optimal mix of the emission tax and R&D subsidy can have “double dividend” benefits.     

Endogenous induced technical change and the costs of Kyoto

We present a model for climate change policy analysis which accounts for the possibility that technology evolves endogenously and that technical change can be induced by environmental policy measures. Both the output production technology and the emission–output ratio depend upon a stock of knowledge, which accumulates through R&D activities. Two versions of this model are studied, one with endogenous technical change but exogenous environmental technical change and the other with both endogenous and induced technical change. A third version also captures technological spillover effects. As an application, the model is simulated allowing for trade of pollution permits as specified in the Kyoto Protocol and assessing the implications in terms of cost efficiency, economic growth and R&D efforts of the three different specifications of technical change.     

Dynamic analysis of bribery firms’ environmental tax evasion in an emissions trading market

Using an R&D-based growth model with dual regulation, we analyse how environmental policies influence pollution, corruption, a growth rate, and welfare. Considering that polluting firms bribe bureaucrats to evade paying environmental tax, we find that a stricter environmental tax leads to a decrease in growth rate via a decrease in the permit rent as well as an increase in pollution and corruption per firm and results in worsening households’ welfare and in improving the bureaucrats’ welfare. Thus, tax evasion with corruption improves households’ welfare and worsens the bureaucrats’ welfare. Our findings imply that tax evasion under dual regulation improves social welfare.     

Environmental Policy with Endogenous Technology from a Game Theoretic Perspective: The Case of the US Pulp and Paper Industry

The merits of different types of regulatory tools in eliminating pollution and at the same time inducing innovation have long been an interest of researchers in both environmental economics and industrial organization. Although there is a substantial theoretical literature investigating the potential for various environmental policies to attain these dual goals, this is a challenging empirical problem because every industry has its own inherent characteristics that play an important role in determining the performance of different regulatory tools. The majority of the work to date focuses on pollution abatement while leaving pollution prevention understudied. In most of the literature firms are also assumed to be symmetric. Asymmetries among firms add another degree and level of complexity to their strategic interactions, and affect the performance of different regulatory tools. This paper investigates the performance of two alternative regulatory tools, an emissions performance standard and an emissions tax, in reducing pollution and inducing pollution prevention and abatement R&D in the US pulp and paper industry. We construct a model representing the industry in an asymmetric Cournot duopoly framework, calibrate the model to disaggregated industry data, and run scenarios to replicate the behavior of the firms in an imperfectly competitive output market. Our results suggest that pollution prevention R&D can respond quite differently than abatement R&D to different policy instruments. The results indicate that R&D spillovers among firms play crucial role in technology development and strategies of the firms. Our results also suggest that strategic interactions between firms in an imperfectly competitive industry can have significant impacts of the levels of both types of R&D.      

Tax cuts and enterprises’ R&D intensity: Evidence from a natural experiment in China

This paper studies the impact of tax cuts on enterprises’ R&D intensity. We use a natural experiment involving China’s business tax changing to value-added tax (“BT to VAT”) to identify any causality. The results reveal that this tax reform has prompted enterprises to increase their research and development (R&D) investment. Specifically, a stronger ability to transfer tax, results in this change having a more significant promotional effect on enterprises’ R&D intensity. Further analysis demonstrates that firms with different ownership types and in different industries respond differently to the “BT to VAT” policy. Our findings are only significant for non-state-owned and other modern service enterprises. This paper provides a theoretical and empirical basis for detailed analyses of the effects of “BT to VAT” policy, particularly the government’s subsequent improvement to the tax reform policy, to further stimulate enterprise investments in R&D as well as industrial upgrading.     

Induced technological change and the attractiveness of CO2 abatement policies

This paper investigates the significance of induced technological change (ITC) for the attractiveness of CO₂ abatement policies. We use analytical and numerical general equilibrium models in which technological change results from profit-maximizing investments in R&D. We show that carbon abatement policies have very different impacts on R&D across industries, and do not necessarily raise the economy-wide rate of technological progress. Focusing only on the sectors with positive R&D impacts can lead to substantial underassessment of the GDP costs of CO₂ abatement policies. The presence of ITC implies lower costs of achieving a given abatement target, but it implies higher gross costs (costs before netting out environment-related benefits) of a given carbon tax. Gross costs depend importantly on the efficiency of R&D markets prior to the introduction of CO₂ policies.     

Growth effects of environmental policy when pollution affects health

In this paper, we develop a R&D-based growth model with a pollution externality and a health production sector. We study how health-impairing pollution affects long term growth, and the effect of an emissions' reduction policy (tax). We show that a tighter environmental tax has positive effects on growth via two channels. On the one hand, it improves workers' health and, thereby, productivity; on the other hand, it induces a reallocation of resources towards R&D and, thereby, higher research intensity. The size of the growth effect of a tighter environmental tax, and the level of the optimal environmental tax, are both positively correlated with the weight individuals place on health relative to consumption. As for welfare, a tighter environmental tax brings about utility gains in the long run and, potentially, also in the short run.     

International Cooperation on Climate-friendly Technologies

We examine international cooperation on technological development as an alternative to international cooperation on emission reductions. We show that without any R&D cooperation, R&D in each country should be increased beyond the non-cooperative level if (i) the technology level in one country is positively affected by R&D in other countries, (ii) the domestic carbon tax is lower than the Pigovian level, or (iii) the domestic carbon tax is set directly through an international tax agreement. We also show that a second-best technology agreement has higher R&D, higher emissions, or both compared with the first-best-outcome. The second-best subsidy always exceeds the subsidy under no international R&D cooperation. Further, when the price of carbon is the same in the second-best technology agreement and in the case without R&D cooperation, welfare is highest, R&D is highest and emissions are lowest in the second-best R&D agreement.     

Capacity investment and green R&D in a dynamic oligopoly under the potential shift in environmental damage

We develop a differential oligopoly game to investigate firms’ capacity investment and green R&D efforts in the presence of the potential shift in environmental damage and under the spillover effect of R&D activities among firms. We find that when both the probability of potential shift in environmental damage and the efficacy of R&D activities are high, the spillover effect will discourage the R&D effort but encourage the capacity investment. Otherwise, the spillover effect will encourage the R&D effort but discourage the capacity investment. Moreover, the potential shift in environmental damage can significantly impact the capacity and green R&D decisions as well as the Pigouvian tax, especially in the case of a large number of firms, a high profitability of the product, a high level of interest rate, and a high level of R&D spillover among firms.     

Strategic environmental policy and the accumulation of knowledge

In dealing with a transnational pollutant-emitting duopoly welfare-maximising policy makers face two negative externalities: imperfect competition and unpriced emissions. Strategic environmental policy models show that these externalities involve a trade-off between reducing pollution and allowing for rent-seeking of the respective firm. This dilemma usually results in a suboptimal internalisation of the negative externality emerging from emissions. Indeed, the conventional model setup includes an R&D stage that enables the firms to mitigate regulation costs. But the typical one period configuration ignores that R&D expenditures create knowledge capital which is, due to its inherent cumulativeness, also effective in following periods. Our model analyses the established trade-off in a two period setting and therefore allows for an investigation of intertemporal knowledge accumulation. We find that the intertemporal effects provide an incentive for a policy maker to set a higher tax rate compared to a one-period setup which lessens the magnitude of the suboptimal internalisation of emissions. Under certain conditions even a tax rate above the Pigouvian level is possible in period 1.     

Fiscal and monetary effects on environmental quality,growth, and welfare

This paper examines the effect of fiscal and monetary policies on economic growth, inflation, environmental quality, and welfare. To this end, the horizontal-R&D growth model is extended to include pollution generated in the intermediate-goods production, and the demand for money through cash-in-advance (CIA) constraints on intermediate-goods production and R&D investment. Fiscal policy embodied in the taxation of pollution decreases output, profits, inflation, and wages in the intermediate-goods sector, reallocating labor to R&D that is the engine of economic growth. As it reduces pollution, it increases welfare if there are strong preferences for a clean environment. In turn, since the inflation rate is an increasing function of the nominal interest rate, the effects of changes in this monetary policy variable extend to the effects of changes in the inflation rate. An increase in the nominal interest rate penalizes employment, wages and output in the R&D sector relatively more if the respective CIA constraint is more demanding and thus economic growth decreases. As it also reduces pollution since decreases intermediate-goods production, it increases welfare if the preferences for a clean environment are strong enough.     

Intellectual Property Rights and Crop-Improving R&D under Adaptive Destruction

This paper studies how the strength of intellectual property rights (IPRs) affects investments in biological innovations when the value of an innovation is stochastically reduced to zero because of the evolution of pest resistance. We frame the problem as a research and development (R&D) investment game in a duopoly model of sequential innovation. We characterize the incentives to invest in R&D under two competing IPR regimes, which differ in their treatment of the follow-on innovations that become necessary because of pest adaptation. Depending on the magnitude of the R&D cost, ex ante firms might prefer an intellectual property regime with or without a “research exemption” provision. The study of the welfare function that also accounts for benefit spillovers to consumers—which is possible analytically under some parametric conditions, and numerically otherwise—shows that the ranking of the two IPR regimes depends critically on the extent of the R&D cost.