Pollution Regulation and the Efficiency Gains from Technological Innovation1

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Previous studies suggest a preference for emissions taxes over (non-auctioned) emissions permits and performance standards based on their potential for promoting technological innovation. We present simulation results that cast some doubt on the empirical importance of this assertion: the welfare gain induced by an emissions tax is significantly larger than that induced by other policies only in the case of very major innovations. We also find that the presence of technology spillovers per se does not necessarily imply large inefficiencies. Thus, despite spillovers, the welfare gain from additional policies to promote innovation (such as R&D subsidies) may be limited.

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