Title: Regulatory choice with pollution and innovation
Description: "This paper develops a simple model of a polluting industry and an innovating firm.  The polluting industry is faced with regulation and costly abatement.  Regulation may be taxes or marketable permits.  The innovating firm invests in R&D and develops technologies which reduce the cost of pollution abatement.  The innovating firm can patent this innovation and use a licensing fee to generate revenue.  In a world of certainty, the first best level of innovation and abatement can be supported by either a pollution tax or a marketable permit.  However, the returns to the innovator from innovation are not the same under the two regimes.  A marketable permit system allows the innovator to capture all of the gains to innovation; a tax system involves sharing the gains of innovation between the innovator and the polluting industry"--National Bureau of Economic Research web site.