Investment In Abatement Technology Research Articles

Fresh Start or Fresh Water: Collateral, Lender Environmental Liability and The Pollution-Employment Tradeoff

This paper investigates how the exposure of secured lenders to their debtors' environmental liability affects employment, production and pollution. Using a US federal reform as a novel natural experiment, I show that firms increase on-site pollution, cut investment in abatement technology and incur more environmental regulatory violations when lenders are less responsible for the environmental liabilities of their collateral. The effects are stronger for firms that are debt-dependent and close to bankruptcy. The impact on firms' production and employment is close to zero and precisely estimated, suggesting that lenders monitor their debtors' environmental compliance with limited distortion on debtor operations.

Flexibility premium of emissions permits

Investments in abatement technology are often characterised by irreversibility and significant implementation lags, whereas emissions permits can be traded at any time. As such, abatement and emissions permit trading systems are hardly perfect substitutes. We formally study the flexibility of emissions permits and propose a unified framework to rationalise the impact of both investment/divestment lags and irreversibility in relation to the price of emissions permits. Using option pricing concepts, we reformulate the technology adoption problem in terms of the technology’s characteristics (irreversibility and implementation lags) and offer a conceptual quantification of the flexibility premium of emissions permits.

The Limits of Limited Liability: Evidence from Industrial Pollution

ABSTRACTWe study how parent liability for subsidiaries' environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries. Using a difference‐in‐differences framework, we find that stronger liability protection for parents leads to a 5% to 9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than increased production. Cross‐sectional tests suggest convexities associated with insolvency and executive compensation drive heterogeneous effects. Overall, our findings highlight the moral hazard problem associated with limited liability.

Second-best taxation for a polluting monopoly with abatement investment

This paper characterizes the optimal tax rule to regulate a polluting monopoly when the firm has the possibility of investing in an abatement technology and the environmental damages are caused by a stock pollutant. The optimal policy is given by the stagewise feedback Stackelberg equilibrium of a dynamic policy game between a regulator and a monopolist. The regulator playing as the leader chooses an emission tax to maximize net social welfare, and the monopolist acting as the follower selects the output and the investment in abatement technology to maximize profits. We find that the optimal tax has two components. The first component is negative and equal to the gap between the marginal revenue and the price caused by the firm market power; the second component is given by the difference between the social and private shadow prices of the pollution stock. Considering a linear-quadratic model we show that if marginal environmental damages are constant, the difference between social and private shadow prices is positive and the optimal policy consists of taxing emissions at a constant rate if the marginal damages are large enough. However, if the marginal environmental damages are increasing the numerical exercises carried out show that this difference is negative at the steady state and the optimal policy gives the firm a subsidy when approaching the steady state regardless of the importance of the environmental damages. This result is explained by the negative effect that abatement technology accumulation has on the tax. Finally, it can be pointed out that although both models yield different predictions about the sign of the optimal policy the dynamics is globally stable for both cases.

Regulation, free-riding incentives, and investment in R&D with spillovers

In this paper, we analyze a duopoly market with investment in abatement technology under environmental regulation. We use a three-stage game where firms invest in a green technology with spillover effects in the first stage, the regulator sets the emission fee in the second stage, and production of the polluting good occurs in the third stage. We analyze two different regulatory regimes: (1) each firm faces the same emission fee (uniform fee), and (2) each firm faces an emission fee dependent on the investment in green technology (type-dependent fee). Firms can differ through their costs of investing in the abatement technology (asymmetric efficiency). We obtain that social welfare is unambiguously higher under the type-dependent regime than otherwise. In addition, we find that the asymmetry in efficiency of investment affects firms’ profits, identifying that efficient (inefficient) firms favor type-dependent (uniform) policy regimes.

Emission Trading Schemes in China and the European Union, Achievements and Challenges

A comparison of the European Union (EU) and China’s emission trading schemes (ETS) is made and we analyze a field survey concerning the pilot ETS in China. The comparison shows that EU’s carbon market is relative mature, given that EU has adopted more flexible and market based measures for its ETS. In China there are more governmental interventions to make the ETS work, but there is lack of a legal foundation and market measures for China’s ETS. The survey yielded information on the attitudes of the participants towards ETS and the linkages between carbon price and the actions by ETS participants to diminish carbon emissions. The survey results show that most participants are willing to participate in ETS and that the ETS does have positive impact on the reduction of CO2 emission. However China is not yet well prepared to move from seven small pilot ETS to a nationwide ETS, since relevant laws and regulations are not well formulated. This also explains why there are much governmental interventions for the 7 pilot ETS in China. The survey result shows that the existing carbon price in China is too low to mobilise industrial investment in abatement technology.

The Limits of Limited Liability: Evidence from Industrial Pollution

We study how parent liability for subsidiaries' environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries. Using a difference-in-differences framework, we find that stronger liability protection for parents leads to a 5-9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than increased production. Cross-sectional tests suggest convexities associated with insolvency and executive compensation drive heterogeneous effects. Overall, our findings highlight the moral hazard problem associated with limited liability.

Robust technology policy against emission leakage: The case of upstream subsidies

Asymmetric regulation of a global pollutant between countries can alter the competitiveness of industries and lead to emissions leakage, which hampers countries’ welfare. In order to limit leakage, governments consider supporting domestic trade-exposed firms by subsidizing their investments in abatement technology. The suppliers of such technologies tend to be less than perfectly competitive, particularly when both emissions regulations and advanced technologies are new. In this context of twin market failures, we consider the relative effects and desirability of subsidies for abatement technology. We find a more robust recommendation for upstream subsidies than for downstream subsidies. Downstream subsidies tend to increase global abatement technology prices, reduce pollution abatement abroad and increase emission leakage. On the contrary, upstream subsidies reduce abatement technology prices, and hence also emissions leakage.

Who invests more in advanced abatement technology? Theory and evidence

AbstractWe study firm investment in abatement technology under a heterogeneous‐firm framework. We find that more‐productive firms make more (less) investment in abatement technology if investment and productivity are complements (substitutes). Under linear demand, firms’ abatement investments exhibit an inverted U‐shape with respect to productivity level. This finding is in contrast to results in existing studies. We also find that in response to tightened environmental regulations, more‐productive firms raise their respective investments in abatement technology, whereas less‐productive firms do the opposite. More‐productive firms have lower pollution emission intensity. The key theoretical predictions are confirmed by empirical tests using Chinese data.

An Optimal Ad Valorem Tax/Subsidy with an Output-Based Refunded Emission Payment for Permits Auction in an Oligopoly Market

In this paper, we explores a hybrid mechanism of output-based refunded emission payment and an ad valorem tax/subsidy to remove the distortions emerging in the permit auction market and the product market. We find that first best outcomes can be achieved under such a hybrid mechanism. A clearing price equal to a Pigouvian tax will endogenously result in the permit auction market. Moreover, we extend the analysis to take into consideration the investment in abatement technology.

Market-Based Instruments and Technology Choices: A Synthesis

Market-based instruments are widely used to encourage innovation and investment in cleaner technologies. Using a simple analytical framework and graphical representations, this paper provides a theoretical synthesis of the relationship between emissions prices/taxes and the firm’s optimal technology choice. This unified treatment incorporates the insights of a wide theoretical literature, as well as providing several new findings. Most surprisingly, perhaps, we identify circumstances in which a higher price of emissions actually reduces the incentive for investment in abatement technologies. We discuss the implications for environmental policy. The main conclusion is that a price on emissions invariably affects the type of abatement technologies firms invest in, so that the technological side of emissions abatement must always be considered in tandem with the design of the market-based instrument itself.

Climate Policy, Learning, and Technology Adoption in Small Countries

A significant reduction in global greenhouse gas emissions requires international cooperation in emission abatement as well as individual countries’ investment in the adoption of abatement technology. The existing literature on climate policy pays insufficient attention to small countries, which account for a substantial proportion of global emission. In this study, we investigate how climate policy and learning about climate damage affect investment in abatement technology in small countries. We consider three alternative climate policy instruments: emission standards, harmonized taxes and auctioned permits. We say that learning is feasible if an international environmental agreement (IEA) is formed after the resolution of uncertainty about climate damage. We find that, either with learning and quadratic abatement costs or without learning, harmonized taxes outperform emission standards and auctioned permits in terms of investment efficiency. Without learning, a large cost of nonparticipation (that a country incurs) in the IEA can be beneficial to the country. Whether learning improves investment efficiency depends on the size of this nonparticipation cost.

The Political Economy of Carbon Securities and Environmental Policy

The costs of the current suboptimal carbon abatement policy are likely in the range of 3 to 6 trillion 2005 US dollars. Using methods from the political economy of environmental policy, the paper develops a new carbon abatement policy instrument, carbon securities. A carbon security entitles its owner to a fixed proportion of ex ante unknown total emissions. This creates an additional group of stakeholders on the side of the issue that has traditionally been underrepresented. The advantages over existing systems include an equilibrium carbon price closer to the social optimum, a more predictable environmental policy, and higher investment in abatement technology.

The role of fixed cost in international environmental negotiations

ABSTRACTWe investigate the relative efficiency of an agreement based on a uniform standard without transfers and one based on differentiated standards with transfers when strictly identical countries deal with transboundary pollution. We especially ask what role fixed cost plays. Two approaches are examined: the Nash bargaining solution, involving two countries, and the coalition formation framework, involving numerous countries and emphasizing self-enforcing agreements. In the former, in terms of welfare, strictly identical countries may wish to reduce their emissions in a non-uniform way under the differentiated agreement. For this result to hold, the fixed cost of investment in abatement technology must be sufficiently high. The nature of the threat point of negotiations, however, also plays a crucial role. As concerns global abatement, the two countries abate more under the uniform agreement than under the differentiated one. In terms of coalition formation when numerous countries are involved, a grand coalition could emerge under a differentiated agreement.

Environmental regulation and investment: Evidence from European industry data

This paper contributes to the empirical literature on the effects of environmental regulation on investment. In particular, we ask whether and how strongly an industry's investment responds to stringency in environmental regulation. Environmental regulation is measured as (i) an industry's total current expenditure on environmental protection, and (ii) a country-industry's revenue from environmental taxes. Focusing on European data of manufacturing industries between 1998 and 2007, we estimate the differential impact of environmental stringency on four types of investment: gross investment in tangible goods, in new buildings, in machinery, and in ‘productive’ investment (investment in tangible goods minus investment in abatement technologies). Both environmental variables enter positively, and their quadratic terms exhibit significantly negative parameter estimates. This, in turn, indicates a positive but diminishing impact of environmental regulation on investment.

Integrating Ecological and Economic Modeling of Eutrophication: Toward Optimal Solutions for a Coastal Area Suffering from Sediment Release of Phosphorus

This paper puts forward a model for managing eutrophication that integrates the salient ecological and economic characteristics of a coastal area suffering from severe nutrient enrichment. The model links the development of phosphorus concentration over time to nutrient emissions from agriculture and habitation. It accounts for differences in agricultural and municipal abatement options and their costs, as well as the need to undertake irreversible investments to set up wastewater treatment facilities. Furthermore, it considers sediment release of phosphorus as a function of annual nutrient loads. The model is parameterized for a 30-km-wide area off the Finnish coast of the Gulf of Finland. The socially optimal policy, which minimizes the sum of monetary damage caused by eutrophication and the costs of nutrient abatement over time, is determined using a dynamic programming approach. The results suggest that considerable investments are warranted to bring wastewater treatment facilities up to date. Continued efforts to reduce agricultural nutrient loading are nevertheless also called for. The analysis provided is a first step toward an integrated analysis of eutrophication that accounts for complexities inherent in the problem, such as sediment release of phosphorus and irreversible investments in abatement technology. The results are sensitive in particular to ecological assumptions and parameterization, and further research is needed in these areas.

The political economy of investment: The case of pollution control technology

This paper seeks to explain the implications of corruption and political instability for firm investment in abatement technology. In our theoretical set-up, a firm has an incentive to under-invest in abatement technology in order to gain a political advantage. The prediction that emerges is that greater corruptibility increases the level of abatement technology investment. This occurs because the strategic incentive to under-invest in pollution control technology declines when policymakers become more corruptible. Moreover, the model predicts that political instability raises abatement technology investment. Using steel-sector panel data from 41 countries for the years 1992–1998, we find empirical support for these predictions.

Environmental regulation with technology adoption, learning and strategic behavior

We analyze a model of environmental regulation with learning about environmental damages and endogenous choice of emissions abatement technology by a polluting firm. We compare environmental policy under discretion, in which policy is updated upon learning new information, versus under rules, in which policy is not updated. When investment in abatement technology is made prior to the resolution of uncertainty, neither discretion nor rules with either taxes or standards achieve an efficient solution except in special cases. When there is little uncertainty, rules are superior to discretion because discretionary policy gives the firm an incentive to distort investment in order to influence future regulation. However, when uncertainty is large, discretion is superior to rules because it allows regulation to incorporate new information. Taxes are superior to standards under discretion regardless of the relative slopes of marginal costs and marginal damages for the case of quadratic abatement costs and damages.

Incentive equilibrium strategies and welfare allocation in a dynamic game of pollution control

This paper considers two neighboring countries wishing to make a joint effort to control pollution emission. We use a differential game model that includes emissions and investments in abatement technology as control variables. First, a coordinated solution that maximizes joint welfare is derived. Then we show that this outcome can be achieved as an incentive equilibrium in which each country uses an emission strategy that is linear in the other country's emission level. Further, we study the bargaining problem of allocating the joint welfare between the two countries, where the status quo is given by an open-loop Nash equilibrium. Finally, we design a mechanism for allocating over time the individual's total welfare such that each player instantaneous welfare under cooperation is higher than his noncooperative welfare at any instant of time.

Attitudes toward Risk and Compliance in Emission Permit Markets

We investigate the effects of uncertainty and concomitant risk aversion as they impact the incentive structure and subsequent operation of an emissions permit market modeled after the U.S. S02 market. Our theoretical results suggest that uncertainty dulls incentives to achieve cost savings through permit trading and inhibits efficient allocation of abatement efforts by firms. We test hypotheses in an experimental laboratory setting and find that the irreversibility of investment in abatement technology may present countervailing incentives for potential sellers of permits, resulting in a wait and see attitude toward adoption of efficient levels of abatement technology