Dynamic incentives by environmental policy instruments—a survey

Abstract In this paper I survey and discuss recent developments on the incentives provided by environmental policy instruments for both adoption and development of advanced abatement technology. A main conclusion to be drawn from the literature is that under competitive conditions market based instruments usually perform better than command and control. Moreover, taxes may provide stronger long term incentives than tradable permits if the regulator is myopic. If the government can anticipate new technology or is able to react on it optimally, regulatory policies by virtue of administered prices (taxes) and policies by setting quantities (issuing tradable permits) are (almost) equivalent. The literature also shows that under competitive conditions there is no difference between auctioning permits and grandfathering. Moreover, timing and commitment of environmental policy is not crucial for adoption under competitive conditions. Commitment has positive incentive effects, however, if an R&D sector has market power. In the presence of market imperfections the ranking of the different policy instruments is ambiguous.

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