Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Ana Yábar Sterling, Pedro Herrera, Janet E. Milne and Hope Ashiabor
Chapter 14: The effects of carbon/energy taxes on R & D expenditure in Sweden
‘Dynamic efficiency’ is one of the criteria for evaluating environmental policy instruments. Being dynamically efficient means the incentive effects of promoting the development of technology for low environmental loads are large. Theoretically, market- based instruments (MBIs), such as environmental taxes and tradable emission permits, have greater incentive effects on technology development than command and control regulations for pollution control (Downing and White, 1986; Milliman and Prince, 1989). In these studies, technological development is assumed to cause a downward shift in the marginal abatement cost curve, and cost savings due to innovation are greater under MBIs than under direct regulations; therefore, MBIs are considered to be dynamically efficient. Other researchers, on the contrary, contend that environmental taxes undermine financial resources for firm research and development (R & D) activities and thereby prevent technological development. Several empirical studies have been conducted on the relationship between environmental policy and technological development. For example, Jaffe and Palmer (1997) examine the relationship between the stringency of environmental policies and technological innovation using industry- level panel data from the US. As a measure of innovation, they use expenditures on R & D activities and the number of patents granted, and as a measure of environmental policy stringency, they use costs for environmental protection. They found that while there exists a positive and significant relationship between the stringency of environmental policies and R & D expenditures, a significant relationship between environmental costs and the number of successful patents cannot be established.
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