Optimal Timing of Environmental Policy: Interaction between Environmental Taxes and Innovation Externalities

32 Pages Posted: 15 Apr 2007

See all articles by Reyer Gerlagh

Reyer Gerlagh

Tilburg University - Center and Faculty of Economics and Business Administration

Snorre Kverndokk

Ragnar Frisch Centre for Economic Research

Knut Einar Rosendahl

Norwegian University of Life Sciences; Statistics Norway - Research Department

Date Written: March 2007

Abstract

This paper addresses the impact of endogenous technology through research and development (R&D) and learning by doing (LbD) on the timing of environmental policy. We develop two models, the first with R&D and the second with LbD. We study the interaction between environmental taxes and innovation externalities in a dynamic economy and prove policy equivalence between the second-best R&D and the LbD model. Our analysis shows that the difference found in the literature between optimal environmental policy in R&D and LbD models can partly be traced back to the set of policy instruments available, rather than being directly linked to the source of technological innovation. Arguments for early action in LbD models carry over to a second-best R&D setting. We show that environmental taxes should be high compared to the Pigouvian levels when an abatement industry is developing. We illustrate our analysis through numerical simulations on climate change policy.

Keywords: Environmental Policy, Technological Change, Research and Development, Learning by Doing

JEL Classification: H21, O30, Q42

Suggested Citation

Gerlagh, Reyer and Kverndokk, Snorre and Rosendahl, Knut Einar, Optimal Timing of Environmental Policy: Interaction between Environmental Taxes and Innovation Externalities (March 2007). FEEM Working Paper No. 35.2007. Available at SSRN: https://ssrn.com/abstract=979918 or http://dx.doi.org/10.2139/ssrn.979918

Reyer Gerlagh (Contact Author)

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Snorre Kverndokk

Ragnar Frisch Centre for Economic Research ( email )

Gaustadalleen 21
N-0349 Oslo
Norway
+47 22958811 (Phone)
+47 22958825 (Fax)

HOME PAGE: http://www.frisch.uio.no/cv/snorrek_eng.html

Knut Einar Rosendahl

Norwegian University of Life Sciences ( email )

PO Box 5033
NO-1432 Aas
Norway
+47 64966117 (Phone)

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway
+47 21094954 (Phone)
+47 21094963 (Fax)

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