Technology licensing and environmental policy instruments: Price control versus quantity control

This paper analyzes the welfare implications of abatement technology licensing under taxation and emission trading schemes. We demonstrate that a firm with a better abatement technology optimally sells a per-unit royalty license to a competitor under both schemes but offers a higher royalty rate under the latter. The emission trading scheme may outperform the taxation scheme regarding social surplus by inducing more production by the licensor and less production by the licensee. These are reversals of the welfare implications suggested by the literature that adopts a partial equilibrium approach or omits either the market for the advanced technology or the final goods.