Environmental Taxes and the Choice of Green Technology

Production and Operations Management 22(5), 1035-1055

Posted: 31 Jan 2009 Last revised: 18 Jul 2014

See all articles by D. Krass

D. Krass

Rotman School of Management

Anton Ovchinnikov

Smith School of Business - Queen's University; INSEAD - Decision Sciences

Date Written: October 25, 2013

Abstract

We study several important aspects of using environmental taxes or pollution fines to motivate the choice of innovative and “green” emissions-reducing technologies. In our model, the environmental regulator (Stackelberg leader) sets the tax level, and in response to it a profit-maximizing monopolistic firm (Stackelberg follower), facing price-dependent demand, selects emissions control technology, production quantity and price. The available technologies vary in environmental efficiency, as well as in the fixed and variable costs.

We find that a firm’s reaction to an increase in taxes is in general non-monotone: while an initial increase in taxes may motivate a switch to a greener technology, further tax increases may motivate a reverse switch. This reverse effect can be avoided by subsidizing the fixed costs of the green technology; otherwise it could lead to cases under which a given technology cannot be induced with taxes.

We then analyze the socially optimal tax level and the technology choice it motivates. We find that when the regulator is moderately concerned with environmental impacts, the tax level that maximizes social welfare simultaneously motivates the choice of clean technology, resulting in a so-called double dividend. Both low and high levels of environmental concerns lead to the choice of dirty technology. The latter effect can be avoided by subsidizing the capital cost of green technology. Overall, providing a subsidy in conjunction with taxing emissions is generally beneficial: it improves technology choice and increases social welfare; however it may increase the optimal tax level.

Keywords: technology, environment, policy, tax, subsidy, fine, pollution

Suggested Citation

Krass, Dmitry and Ovchinnikov, Anton, Environmental Taxes and the Choice of Green Technology (October 25, 2013). Production and Operations Management 22(5), 1035-1055 , Available at SSRN: https://ssrn.com/abstract=1335479

Dmitry Krass

Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada

Anton Ovchinnikov (Contact Author)

Smith School of Business - Queen's University ( email )

143 Union Str. West
Kingston, ON K7L3N6
Canada

INSEAD - Decision Sciences ( email )

United States

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