Conference Agenda

We examine how an extreme climate event affects the incentives of regulators to invest in adaptation measures that reduce the impact on firms' production costs, and how this investment affects environmental policy and firms' incentives to invest in abatement. Different government agencies implement these policies (adaptation and emission fees) and can exhibit symmetric or asymmetric preferences for pollution. We find that investment in adaptation and abatement are substitutes, and more likely climate events decrease firms' investment in abatement. We also find that severe climate events can induce a lower investment in adaptation, as climate events can be used as a tool to reduce expected pollution. In addition, we show that symmetric agencies induce a lower investment in adaptation. Finally, we identify the welfare effects of adaptation and environmental policy, evaluating welfare gains/losses from each policy.

Green technological change involves multiple market failures, such as an environmental externality, market power due to protected R&D results, and economic incentives for incumbents to protect old, emission-intensive technologies. It is thus hard to achieve first-best outcomes, as these interacting market failures demand several coordinated policy interventions. An alternative could be the use of state-owned enterprises (SOE) to drive green technological change. They are more easily controlled but often less efficient. We analyze this control vs efficiency trade-off in a theoretical model setting where an existing green technology can be further improved by R&D thereby facilitating a broad technology diffusion. We then compare green technological change driven by private firms that are imperfectly regulated via an emission tax to such change driven by an SOE that is less efficient in production. We show that the decision problem is surprisingly complex, as using private firms or an SOE often results in different market structures. Our results indicate that, with private firms, there can be over- or under-investment in R&D and they might reduce the availability of the green technology to gain higher prices or to protect their investment in old technologies. These problems do not arise with an SOE which, however, induces higher costs due to its inefficiency. In cases where the SOE is not too inefficient and where R&D yields large improvements in the quality of the green technology, the SOE is often the better choice. On the other hand, private firms are preferable if either the market for the green technology is not important or an SOE would not succeed on such a market due to its cost inefficiency. Our model is of particular relevance for small or developing countries that do not develop new green technologies but rather adapt such technologies to their local conditions and often face the problem whether this final R&D step should be done by existing SOEs (such as public utilities) or delegated to private firms.

Regulating polluters in a monopolistically competitive framework involves a trade-off between exploiting scale economies and mitigating environmental impacts. This paper extends the Dixit-Stiglitz-Krugman model of monopolistic competition by considering that production generates pollution and firms take into account that their price choices affects rivals' payoffs and vice versa. This alternative approach improves the consistency of the laissez-faire solution with empirical evidence. While optimal pollution is always lower than under laissez-faire, both optimal production and the number of firms can be higher or lower depending on the parameters measuring economies of scale. Neither pollution taxes not emission standards constitute entry impediments: while an emission standard does not change the number of firms in the long run equilibrium, however, the pollution tax induces entry. There is no systematic preference of one policy versus the other in social welfare terms, but neither instrument implements the social optimum.

We examine environmental polices when firms adopt clean technologies and market structure is endogenous from firm entry. In unregulated equilibrium, private incentives lead to significant inefficiencies both in the individual profit-maximizing choice of technology and in the aggregate market structure even in the presence of environmentally motivated consumers. To deal with these inefficiencies, we examine first- and second-best regulation based on time-consistent pollution taxes and clean technology subsidies. Under first-best regulation, these taxes and subsidies can be imperfectly substituted as policy tools. Under second-best regulation, time-consistent taxes and subsidies are equivalent to achieving efficient technology choice at the firm level, but they are not necessarily equivalent on aggregate when the market structure is endogenous. In general, our analysis suggests a key role of market structure in the design of environmental policies due to excessive or insufficient firm entry.