The Merits of New Pollutants and How to Get Them When Patents Are Granted

The performance of market based environmental regulation is affected by patents and vice versa. This interaction is studied for a new type of innovation where new technologies reduce emissions of a specific pollutant but at the same time cause a new type of damage. A robust finding is that the efficiency of permits is affected by monopoly pricing of the patent-holding firm. This result carries over to other types of innovation. Taxes are inefficient if technologies produce perfect substitutes and share all scarce inputs. Moreover, the optimal tax on pollution might be negative.Innovation; Environment; Instrument Choice; Patents; Monopoly Pricing

How Delegation Improves Commitment

We often use delegation as a commitment device if a government faces problems of timeinconsistency. McCallum (1995, AER P&P) challenged this practice, claiming that delegation merely relocates the commitment problem but does not solve it. In a model where delegation and specific policies are subject to the same commitment technology it is shown that McCallum’s conjecture holds if optimal ex-ante policies are fixed. However, with a flexibility-credibility trade-off delegation is both desirable and improves credibility. While delegation does not increase commitment per se it makes it more attractive and increases investments in credibility. Delegation can therefore serve as a valid commitment device.Time-inconsistency, commitment, delegation

The Design of Permit Schemes and Environmental Innovation

Most real world emission permit schemes are in effect hybrid instruments that feature both quantity and price controls. While the effects of price bounds are well understood for issues such as uncertain abatement costs it has not been investigated how such bounds affect time-consistency of environmental regulation and research incentives. The present paper analyzes these issues for two types of innovation. While price bounds increase static efficiency they reduce incentives to innovate. Commitment on details of a scheme’s design might be necessary to avoid the latter.Environmental Regulation, Hybrid Instruments, Innovation, Time-inconsistency

On Backstops and Boomerangs: Environmental R&D under Technological Uncertainty

The literature on environmental R&D frequently studies innovation as a two-stage process, with a single R&D event leading from a conventional polluting technology to a perfectly clean backstop. We allow for uncertainty in innovation in that the new technology may turn out to generate a new pollution problem. R&D may therefore be optimally undertaken more than once. Using and externding recent results from multi-stage optimal control theory, we provide a full characterization of the optimal pollution and R&D policies. The optimal R&D program is strictly sequential and has an endogenous stopping point. Uncertainty drives total R&D effort and its timing.stock pollution, backstop technology, multi-stage optimal control, pollution thresholds, uncertainty

The Climate Policy Hold-Up: Green Technologies,Intellectual Property Rights, and the Abatement Incentives of International Agreements

The success of global climate policies over the coming decades depends on the diffusion of 'green' technologies. This requires that international environmental agreements (IEAs) and trade-related intellectual property rights (TRIPs) interact productively.Using a simple and tractable model, we highlight the strategic reduction in abatement commitments on account of a hold-up effect. In anticipation of rent extraction by the innovator signatories might abate less than non-signatories turning the IEA 'brown'. Self-enforcing IEAs have fewer signatories and diffusion can reduce global abatement under TRIPs. Countries hosting patent holders extract rents from TRIPs, but may be better off without them

The Economics of Environmental Innovation, Regulation and Commitment

The present thesis extends the economic literature by introducing green horizontal innovation. Green horizontal innovation is characterized by new technologies that solve an existing pollution problem but give rise to a new one at the same time. A prominent example are CFCs that once replaced poisonous refrigants but are now phased-out themselves. Even groundbreaking technological advances are often merely shifting instead of solving environmental problems. Another concept introduced in this thesis is technological uncertainty. Ex-ante the properties of the next technology developed are not known. New technologies can be of two types. Either they come as perfectly clean ‘backstop’ technologies or as green horizontal innovations and are labeled ‘boomerangs’. In an infinite horizon model the socially optimal pollution and R&D policies under green horizontal innovation and technological uncertainty are derived. The main results are that in the absence of a backstop all available polluting technologies should be engaged in production. Moreover, under technological uncertainty a finite sequence of innovations is optimal. This informs ongoing policy debates like the one on the future of electricity production where there are trade-offs between two polluting technologies – nuclear power and fossil fuels. Moreover, the present thesis evaluates implementation strategies under green horizontal innovation. In a two-period model the government grants patents and adjusts environmental policy in case innovation occurs. However, the government is assumed to be unable to pre-commit on future environmental policies. The key insight is that tradable permits can fail to implement static efficient allocations. Efficiency is limited by patent holder’s monopoly pricing. The owner of the new technology might choose a license fee that restricts output to levels below the social optimum. Quantity regulation via pollution permits is therefore not effective. In contrast to previous results in the literature this also holds under vertical environmental innovation. The interaction between patents and environmental regulation goes therefore both ways. The choice of the environmental instrument affects incentives to innovation and patents create distortions in output markets. More sophisticated instruments are shown to be able to reduce the distortions caused by patents. A government’s ability to commit is crucial for dynamic efficiency. A prominent concept to solve the time-inconsistency problem is to delegate specific policies to an independent agency, e.g. a central bank. McCallum (1995) criticized this approach by claiming that delegation does not solve the commitment problem but merely relocates it. McCallum’s critique is formalized and partially contradicted. If there is uncertainty over future states of the world, delegation can improve credibility. Commitment is achieved by the costs incurred to pass and later change a law or the constitution. The higher these costs, the more credible are the associated policies. However, if there is uncertainty over the optimal future policy, these costs reduce a government’s flexibility. Hence, there is a trade-off between credibility and flexibility. Delegation is able to relax this trade-off if the bureaucrat responds to shocks in a way that is at least somewhat in line with the government’s preferences. Under uncertainty the government has more incentives to invest into credibility if she delegates. This insight explains the observed commitment effect of delegation and helps to improve the institutional design of environmental regulation and other policy areas

Testing for the Best Instrument to Generate Sustainable Food Consumption

 The increase in the level of greenhouse gas (GHG) emissions in the atmosphere in the last centuries, and the subsequent increase in temperature, has been a widely studied area in the last few decades. Climate change has become a key item on the political agenda due to concerns regarding the sustainability of current human consumption for future generations. Consumption of food and agricultural goods constitutes an important part of household based GHG emissions, and the relatively low costs associated with environmental improvements make it an interesting area of study to understand behavioural changes. Despite general agreement on the need to curb the amount of GHG emissions worldwide, little evidence exists regarding the best instruments policymakers can employ to stimulate changes toward more sustainable consumption. The present work explores which instruments are most effective in fostering change to more environmentally friendly food consumption. The instruments tested are CO2 labelling, GHG abatement subsidy and product-specific bans. We used a simulated online shopping trip in supermarkets in the Greater London area in the United Kingdom, where respondents shopped in four product categories: cola, milk, meat (chicken and beef), and butter/margarine. Consumer preferences reveal that, in the presence of these instruments, quantity instruments performed better than price incentives and labelling

The market stability reserve in the EU emissions trading system: a critical review

Having experienced low prices for about a decade, the European Union Emissions Trading System has been supplemented with the market stability reserve (MSR) that adjusts the supply of allowances to market outcomes. We critically review the literature assessing the performance of the MSR against several policy objectives. In doing so, we cover both conceptual aspects and quantitative assessments. We conclude by pointing out important policy implications and open issues for further research

Closing the Implementation Gap: Obstacles in Reaching Net-Zero Pledges in the EU and Germany

The European Union and Germany have recently committed themselves to greenhouse-gas neutrality by 2050 and 2045, respectively. This substantially reduces their gaps in ambition to the Paris climate goals. However, the current climate policy mix is not sufficient to reach these targets: There is a major implementation gap. Based on economic, legal, and political science perspectives, this article identifies key obstacles in legislating stringent climate policy instruments and making them effective. Using a simple framework, we map the stage of the process in which the obstacles are at work. Moreover, we discuss the potential effectiveness of a select list of prominent drivers of climate-related regulation in overcoming said obstacles and conclude by pointing towards conditions for closing the implementation gap. In doing so, we focus on the current legislative processes of the “Fit-for-55” package by the European Commission and the 2021 Federal Climate Change Act in Germany. Our analysis builds on the extant literature, and we suggest avenues for further research