Trends, Investment Behaviour and Policy Design
Edited by Raymond J.G.M. Florax, Henri L.F. de Groot and Peter Mulder
Chapter 9: Energy Investment Behaviour: Firm Heterogeneity and Subsidy Design
Daan P. van Soest and Herman R.J. Vollebergh INTRODUCTION 1 Over the past three decades, much attention has been paid to the potential of public policies to reduce the emission of polluting substances that give rise to environmental problems, such as global warming and acid rain. A wide range of policy instruments is available, ranging from pollution taxes, tradable emission permits, abatement subsidies, quotas and performance standards, to covenants. The main criterion by which the economic profession has evaluated the instruments is that of static efficiency; that is, the extent to which these instruments can achieve a specified environmental objective at minimum cost. A necessary condition for static efficiency is that marginal abatement costs are equalized across firms, and in this respect instruments like emission taxes or tradable emission permits are generally preferred to quotas, performance standards and investment subsidies (Baumol and Oates, 1988). However, static efficiency is just one of many criteria on which to base instrument choice, and it is not necessarily the most important one (Jaffe and Stavins, 1995; Jaffe et al., 2003). With ongoing economic growth and the associated pressure on the natural regenerative capacity of the environment, ever more efficient technologies should be developed and adopted to ensure that environmental protection and economic growth are not incompatible in the long run. These technologies should be able to produce the same amount of output with less pollution, or to abate pollution at lower marginal cost. Indeed, Kneese and Schulze (1975, p. 38) already argued that ‘over...
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