Emissions abatement R&D and environmental policy

Pereira, Jorge (2017). Emissions abatement R&D and environmental policy PhD Thesis, School of Economics, The University of Queensland. doi:10.14264/uql.2018.75

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Author Pereira, Jorge
Thesis Title Emissions abatement R&D and environmental policy
School, Centre or Institute School of Economics
Institution The University of Queensland
DOI 10.14264/uql.2018.75
Publication date 2017-08-25
Thesis type PhD Thesis
Supervisor Flavio Menezes
Heiko Gerlach
Lana Friesen
Language eng
Subjects 1401 Economic Theory
1402 Applied Economics
Formatted abstract
     This dissertation studies the interaction between environmental policy, market structure and
firms’ incentives to invest in emissions reduction technology or emissions abatement research
and development (R&D). It consists of three individual papers. The first paper examines how
the intensity of market competition may affect the environmental policy. The second paper
studies the conditions under which the design of an environmental policy can be beneficial for
firms and society. The third paper analyses the effect of environmental R&D organisational
structures on firms’ innovation activities, profits, and social welfare when the R&D outcome is

     The first paper investigates the optimal environmental policy (the mix of emissions tax and
R&D subsidy) when two firms, producing differentiated products, compete in the output market
over time. Firms compete over supply schedules, which encompass a continuum of market
structures from Bertrand to Cournot. While production generates environmentally damaging
emissions, firms can undertake R&D, which has the sole purpose of reducing emissions. In addition
to characterising the optimal policy, we examine how the optimal tax and subsidy, and the
optimal level of abatement change as competition intensifies, as the dynamic parameters change
and as the investment in abatement technology changes. In this setting, increased competition
no longer necessarily leads to an increase in welfare. Instead, there are two forces. Competition
increases welfare through its impact on the final goods price. However, lower prices result in
larger quantities and more pollution. Our contribution is to show how this impact depends on
the extent of the market, the nature of preferences and the technology.

     The Porter Hypothesis, formulated by Michael Porter (1991), states that a well-designed
environmental policy could encourage innovation and be beneficial for firms and society. In the
second paper, we investigate the conditions under which the design of an environmental policy
can align social and private interests. Results consistent with the Porter Hypothesis are derived
without any behavioural assumptions or bounded rationality arguments, as it is commonly the
case in the related literature. N symmetric firms compete in the output market by producing and
selling homogeneous goods. Production entails the emission of a pollutant, which may be taxed.
The general conditions for firms’ profits and social welfare to be higher under an emissions tax
than under no tax are determined. The key insight is that, for the representative firm’s profit to
increase with an increase in emissions tax, the emissions tax cost pass-through must be greater
than the net emissions per unit of production, adjusted for the number of competing firms. As
the intensity of competition increases, firms are more likely to benefit from an emissions tax, as
the tax facilitates the exercise of market power.

     The third paper analyses firms’ and social planner’s choices of R&D cooperation when the
innovation outcome is uncertain. Two firms compete in the output market by producing and
selling homogeneous goods. Production entails the emission of a pollutant, which is taxed and
induces firms to invest in emissions reduction R&D. It is assumed that the R&D outcome is
uncertain and firms can either choose to fully protect or fully share their R&D results. Under
R&D uncertainty, the highest payoff for the firm is when it succeeds in its R&D efforts whilst
its rival fails. Subsequent ex-post asymmetries can also lead to one firm exiting the market. This
introduces additional strategic elements for the firm, leading to new insights regarding firms’
and social planner’s preferences. It is shown that for lower levels of marginal environmental
damages, firms and the social planner always prefer cooperation in R&D and information sharing
as this leads to the highest expected profit and social welfare. For higher levels of marginal
environmental damages, firms always choose to cooperate but not to share information. The
social planner also prefers firms not to share information but only to cooperate when they are
efficient in their abatement R&D; under inefficient abatement R&D conditions, no cooperation
in R&D and no information sharing leads to the best social outcome. The private level of
investment in R&D is always smaller than the social optimum.
Keyword Technology
Emission tax
Porter Hypothesis

Document type: Thesis
Collections: UQ Theses (RHD) - Official
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Created: Wed, 23 Aug 2017, 11:49:00 EST by Jorge Pereira on behalf of Learning and Research Services (UQ Library)