The objective of this research project is to explore how endogenous technological change affects the appropriate choice among, design of, and economic gains, from environmental policy instruments with a particular focus on carbon abatement policies. Three new papers are discussed in the Future Activities section.
Environmental policies can improve economic efficiency through two channels.
First, by curbing excessive amounts of pollution and, second, by simulating the development of new technologies that will reduce the costs of pollution control in future years. A number of people have suggested that the gains from promoting innovation are much more important than the gains from just controlling pollution over time. Thus, they argue that when choosing among different environmental policy instruments, such as pollution taxes and emissions permits, we should pick the instrument that is most effective at stimulating innovation. In the past, economists only focused on the gains from controlling pollution and ignored the gains from inducing innovation. The paper makes use of both analytically solved models to provide intuition, and numerically solved models to gauge the quantitative importance of technological innovation.