Green Technology and Optimal Emissions Taxation

Date01 April 2017
DOIhttp://doi.org/10.1111/jpet.12165
Published date01 April 2017
GREEN TECHNOLOGY AND OPTIMAL EMISSIONS TAXATION
STUART McDONALD
The Renmin University of China
JOANNA POYAGO-THEOTOKY
La Trobe University and Rimini Centre for Economic Analysis
Abstract
Unless an active environmental policy exists, firms have no incentive
to engage in abatement or environmental R&D so policy design is of
paramount importance. This design heavily depends on the way R&D
spillovers operate. There are two distinct types of R&D spillover: output
spillover and input spillover. An input spillover operates on the expen-
diture toward pollution reduction, whereas an output spillover man-
ifests as the achieved abatement. Under optimal emissions taxation,
significant differences arise due to this distinction, in particular, when
the spillover operates on R&D inputs. In an oligopolistic setting, the
result is higher R&D expenditure, but also higher aggregate emissions
and, consequently, higher emissions taxes. By contrast, when spillovers
occur in R&D output, there is a U-shaped relationship between the op-
timal tax and the spillover, showing a trade-off between the optimal tax
rate and spillovers when these are low. In terms of the relative effective-
ness of different R&D organization setups, combining emissions taxes
with R&D cooperation, this paper shows that under low levels of R&D
spillover R&D cooperation gives higher emissions reductions, whereas
when spillovers are high this is not the case.
1. Introduction
Public policies targeting R&D on emissions-reducing technology offer the greatest scope
for achieving prolonged and sustained reduction in emissions (Kneese and Schultze
1975; Jung, Krutilla, and Boyd 1996; Jaffe, Newell, and Stavins 2003; OECD 2010). With-
out the presence of some form of policy to internalize the cost of pollution, the relevant
incentives are not sufficient to promote investment in green technology (environmental
R&D [E-R&D]). Benefits generated by R&D do not always accrue to the investing firm
Stuart McDonald, Renmin University of China, No. 59 Zhongguancun Street, Haidian District, Beijing,
China 100872 (smcdonald@renmin.edu.cn). Joanna Poyago-Theotoky, Department of Economics and
Finance, La Trobe University, Melbourne, VIC 3086, Australia (j.poyago-theotoky@latrobe.edu.au).
We are grateful to Emmanuel Petrakis, an anonymous referee, an Associate Editor and the Editor for
valuable comments. We also thank participants at EAERE 2012 (Prague), PET 2012 (Taipei), and JEI
2012 (Murcia) for their suggestions. McDonald acknowledges funding from a Global Change Institute
Small Grant and The University of Queensland Early Career Researcher Grant.
Received October 26, 2014; Accepted March 3, 2015.
C2016 Wiley Periodicals, Inc.
Journal of Public Economic Theory, 19 (2), 2017, pp. 362–376.
362

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