Emissions abatement R&D and environmental policy

Abstract

This dissertation studies the interaction between environmental policy, market structure and firms' incentives to invest in emissions reduction technology or emissions abatement research and development (R&D). It consists of three individual papers. The first paper examines how the intensity of market competition may affect the environmental policy. The second paper studies the conditions under which the design of an environmental policy can be beneficial for firms and society. The third paper analyses the effect of environmental R&D organisational structures on firms' innovation activities, profits, and social welfare when the R&D outcome is uncertain.The first paper investigates the optimal environmental policy (the mix of emissions tax and R&D subsidy) when two firms, producing differentiated products, compete in the output market over time. Firms compete over supply schedules, which encompass a continuum of market structures from Bertrand to Cournot. While production generates environmentally damaging emissions, firms can undertake R&D, which has the sole purpose of reducing emissions. In addition to characterising the optimal policy, we examine how the optimal tax and subsidy, and the optimal level of abatement change as competition intensifies, as the dynamic parameters change and as the investment in abatement technology changes. In this setting, increased competition no longer necessarily leads to an increase in welfare. Instead, there are two forces. Competition increases welfare through its impact on the final goods price. However, lower prices result in larger quantities and more pollution. Our contribution is to show how this impact depends on the extent of the market, the nature of preferences and the technology.The Porter Hypothesis, formulated by Michael Porter (1991), states that a well-designed environmental policy could encourage innovation and be beneficial for firms and society. In the second paper, we investigate the conditions under which the design of an environmental policy can align social and private interests. Results consistent with the Porter Hypothesis are derived without any behavioural assumptions or bounded rationality arguments, as it is commonly the case in the related literature. N symmetric firms compete in the output market by producing and selling homogeneous goods. Production entails the emission of a pollutant, which may be taxed.The general conditions for firms' profits and social welfare to be higher under an emissions tax than under no tax are determined. The key insight is that, for the representative firm's profit to increase with an increase in emissions tax, the emissions tax cost pass-through must be greater ii than the net emissions per unit of production, adjusted for the number of competing firms. As the intensity of competition increases, firms are more likely to benefit from an emissions tax, as the tax facilitates the exercise of market power.The third paper analyses firms' and social planner's choices of R&D cooperation when the innovation outcome i...