Edited by Janet E. Milne and Mikael S. Andersen
Chapter 20: The role of environmental taxation in spurring technological change
Do environmental taxes change the use and even the invention of new technologies? This simple question has not generated much interest in the literature until recently. For a long time, since the seminal contribution by Baumol and Oates (1971), the focus in most contributions, in particular by economists, has been on the static cost-effectiveness or efficiency of such taxes. So-called Pigouvian taxes guarantee cost efficiency because agents, like consumers or firms, select the lowest-cost options when they are confronted with a price on environmental pollution. For this simple theorem to hold, variety in the cost of different existing abatement options is enough, and new technological options are not at all necessary. Despite this focus on cost-effectiveness potential, dynamic impacts have always generated some interest. Kneese and Schulze, for instance, pointed out long ago that ‘Over the long haul, perhaps the most important single criterion on which to judge environmental policies is the extent to which they spur new technology toward the efficient conservation of environmental quality’ (Kneese and Schulze 1975, 38). Indeed, it is hardly disputed nowadays that environmental taxes can be of critical importance to the inducement and diffusion of new technologies, or ‘technological change’ for short. Imposing an environmental tax on a polluting activity is likely to increase efforts to generate new ideas about abatement options, subsequent filings of new patents, pilots of new technologies, changes in process and product characteristics, and, finally, a reduction in emissions at lower cost.
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