69th International Atlantic Economic Conference

March 24 - 27, 2010 | Prague, Czech Republic

Tradable Permits Under Environmental and Cost-Reducing R&D

Saturday, 27 March 2010: 16:45
Gamal Atallah, Ph.D. , Economics, University of Ottawa, Ottawa, ON, Canada
Jianqiao Liu, M.Sc. , Economics, University of Ottawa, Ottawa, ON, Canada
This paper models the simultaneous investments in cost-reducing and environmental

R&D by asymmetric firms competing à la Cournot. Pollution rights are allocated by

the regulator, and firms can trade pollution permits. Both R&D competition and

R&D cooperation are considered; in the latter case, firms fully share information about

technologies. In a 3-stage game, firms first invest in R&D, then trade permits, and

then compete in output. The strategic interaction between different types of R&D

investments is analyzed. It is found that the permit price depends on total permits

only, not on their initial allocations. The optimal allocation of pollution rights by the

social planner is also considered; the allocation of permits between firms matters for

social welfare in the presence of environmental R&D under noncooperative R&D, but

is irrelevant under cooperative R&D. Moreover, it is optimal to give firms less permits

when spillovers are higher. In addition, grandfathering permits is studied under R&D

noncooperation. Furthermore, an R&D budget constraint is introduced. When the

constraint is binding, firms underinvest more in standard R&D than in environmental

R&D.