This dissertation investigates the effectiveness and efficiency of emission tax policy in incentivizing firms’ investment in clean technology research and development (R&D). Specifically, it focuses on how an emission tax may fail to induce adequate investment in clean technology R&D, and how this can be overcome by a targeted subsidy scheme. In implementing the emission tax, this study shows how the sequencing of commitment to a specific tax level can encourage higher clean technology R&D, and how it affects cooperation and coordination in research investment.
This study gives three main contributions to emission tax policy design. First, it shows how an emission tax may fail to achieve its role of inducing adequate clean technology R&D under circumstances when there is a one-way R&D spillovers from technologically superior firms to other firms in the industry. This is a fundamental problem since clean technology R&D is commonly acknowledged as a key solution to reduce pollution and addresses the problem of climate change over the long run. Therefore, a targeted subsidy is proposed as a complementary policy solution to address the problem. Second, the study shows how emissions tax policy can be better designed to elicit higher investment in clean technology R&D compared to conventional approach. Lastly, it also highlights the unintended consequences of firms’ anti-competitive behavior under the emission tax. The main research tools involve theoretical and laboratory experiments. The theoretical framework is based on industrial organization models. It builds on the existing oligopoly market structure and directed technical change towards clean innovation. The experimental design is a Cournot duopoly market environment where firms are subjected to an emission tax, which is incorporated in their cost function. The firms’ investment structure borrows from the literature on contributions to public good with positive externalities.
The research result shows that R&D investment is significantly higher when government commit to an emission tax level after observing firms’ R&D investment, compared to the conventional approach where government precommits to the tax level prior to firms’ decision on R&D investment. The former way of implementing emission tax is known as time consistent tax. However, research cooperation is higher and more stable under the precommitment tax policy compared to the time consistent tax policy. Research cooperation is pertinent because it leads to higher social welfare through more pollution abatement, relative to noncooperative research. In the time consistent emission tax regime, it was found that firms can cooperate in clean technology R&D even without binding agreements, as long as R&D spillovers are symmetric and firms can communicate with each other. However, this leads to firms colluding in the product market. Such anticompetitive behavior is found to erode social welfare more than the gains from research cooperation.