Equilibrium incentives for adopting
            cleaner technology under emissions pricing
Policymakers sometimes presume that
            adopting a less polluting technology necessarily improves
            welfare.  This view is generally mistaken.  Adopting a
            cleaner technology is costly, and this cost must be weighed
            against the technology's benefits in reduced pollution
            and reduced abatement costs.  The literature to date has not
            satisfactorily examined whether emissions pricing properly
            internalizes this tradeoff between costs and benefits.  And
            if the trend toward greater use of economic instruments in
            environmental policy continues, as is likely, the properties
            of those instruments must be understood, especially for
            dynamic efficiency.  The authors examine incentives for
            adopting cleaner technologies in response to Pigouvian
            emissions pricing in equilibrium (unlike earlier analyses,
            which they contend, have been generally incomplete and at
            times misleading). Their results indicate that emissions
            pricing under the standard Pigouvian rule leads to efficient
            equilibrium adoption of technology under certain
            circumstances.  They show that the equilibrium level of
            adopting a public innovation is efficient under Pigouvian
            pricing only if there are enough firms that each firm has a
            negligible effect on aggregate emissions.  When those
            circumstances are not satisfied, Pigouvian pricing does not
            induce an efficient (social welfare-maximizing) level of
            innovation.  The potential for inefficiency stems from two
            problems with the Pigouvian rule.  First, the Pigouvian
            price does not discriminate against each unit of emissions
            according to its marginal damage.  Second, full ratcheting
            of the emissions price in response to declining marginal
            damage as firms adopt the cleaner technology is correct
            expost but distorts incentives for adopting technology ex
            ante. The next natural step for research is to examine
            second-best pricing policies or multiple instrument
            policies.  The challenge is to design regulatory policies
            that go some way toward resolving problems yet are geared to
            implementation in real regulatory settings.  Clearly, such
            policies must use more instruments than emissions pricing
            alone.  Direct taxes or subsidies for technological change,
            together with emissions pricing, should give regulators more
            scope for creating appropriate dynamic incentives.  Such
            instruments are already widely used: investment tax credits
            (for environmental research and development), accelerated
            depreciation (for pollution control equipment), and
            environmental funds (to subsidize the adoption of pollution
            control equipment).  Such direct incentives could be
            excessive, however, if emissions pricing is already in
            place.  All incentives should be coordinated.