Government intervention in green technology innovation: The carrot, the stick or both?

Abstract

Green technologies are crucial for reducing carbon emissions; however, firms may maintain “dirty” technologies due to low returns on green alternatives. To promote the transition to a low-carbon society, the government can establish regulatory measures such as subsidizing green investments, imposing taxes on emissions, or employing a combination of the two instruments. However, there is ongoing debate regarding whether these measures incentivize green-technology innovation and abate carbon emissions. In this study, we examine the effectiveness of the carbon subsidy, carbon tax, and hybrid policy in terms of their impacts on society, customers, and the incentives for the green-technology innovation of a risk-averse firm under demand uncertainty. We develop models that incorporate each of these measures and the benchmark model with no intervention. We find that when the degree of demand uncertainty is low, the government will not employ any carbon regulation; when the degree rises, the hybrid policy generates the highest social welfare. In cases of a medium degree, there exist thresholds below which the government uses the carbon tax and above which it opts for the carbon subsidy. Furthermore, we examine the effects of environmental damage, risk aversion, and customers' environmental preferences on the optimal carbon regulatory policy.