INTRODUCTION The relationship between environmental policies and technological change is complex, however, and there is no unambiguous case for preferring any of the policy instruments from emissions taxes, auctioned emissions permits and free permits. In practice, there are even more factors that make the evaluation difficult (Fischer et al., 2003). Thus, how actual environmental policies affect technological change positively is an empirical question. Thorough analyses of technological change are essential for identifying appropriate policy actions to encourage economic growth and mitigate negative effects of environmental problems. The principal focus of this chapter is to measure technological change both for market and nonmarket (that is, environmental) outputs and to find the determinants of these changes. We employ translog multi-input, multi-output specification to estimate the productivity index (and its components of technological change and efficiency change) following Fuentes et al. (2001). 2 BACKGROUND Environmental Policies and Technological Change Numerous works in the literature have examined theoretically the role of environmental policy in encouraging (or discouraging) productivity growth.1 On the one hand, abatement pressures may stimulate innovative responses that reduce the actual cost of environmental compliance below the original estimates (Downing and White, 1986). Firms might be reluctant to innovate, on the other hand, if they believe that regulators will respond by ratcheting up standards even more tightly (for example, McCain, 1978). Regarding the environmental technologies, recent empirical studies have found a systematic relationship between environmental regulation and environmental technological progress. Empirical analyses of environmental 97 98 Chinese economic development and the environment...
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