Policy Instruments and Incentives for Environmental R&D:A Market-Driven Approach

Environmental policy instruments have an impact on the incentives to invest in environmental R&D and this link should deserve careful consideration when introducing new instruments. Some authors argue that environmental taxes and tradable permits have rather comparable impacts on environmental R&D but we think that only very specific conditions do lead to this kind of conclusion. If we broaden the perspective by integrating elements from the Industrial Organisation literature and depart for Pigouvian settings, a market-driven approach would link the incentive to invest in new technologies to the market potential offered by the policy instruments. If taxes turn out to be very expensive for the polluting or emitting industries, we can assume that these targeted firms would be more interested to invest in new - emission reducing - technologies than in cases where the chosen policy instrument will lead to a very limited cost. We therefore developed a dynamic model that enables to compare the incentives on environmental R&D resulting from taxes, emission trading, voluntary approaches and subsidising environmental R&D. We do not claim to capture all relevant market interactions, but our findings confirm the intuition that environmental taxes have a clearly different impact on environmental R&D compared to emission trading.