Work

Environmental regulation and pollution abatement under incremental innovation

Year: 2025

Type: article

Abstract: We propose a framework for modelling abatement decisions by regulated polluters in a carbon pricing regime, when firms can reduce emissions both by controlling product output and by adopting new environmental technologies incrementally. We show that, in equilibrium, for the firm it is optimal to mix innovation and output control, abating more by means of the strategy that is more cost effective. Since the marginal cost of abating via output control increases with technological deepening, over time firms deal with carbon pricing by abating disproportionately more by means of innovation. Increased carbon pricing may amplify this pattern, thereby widening technological asymmetries between firms and countries. Econometric analysis on a sample of firms under the EU-ETS provides empirical evidence consistent with the main implications of the model. Taken together, our results lends support to technology standards as a counterbalance mechanism to accompany carbon pricing, in order to restrain unwanted technological divergence.

Source: Structural Change and Economic Dynamics

DOI: 10.1016/j.strueco.2025.04.009

Authors: Filippo Belloc, Salvatore Bimonte

Institution: University of Siena

Language: English

Topic: Climate Change Policy and Economics

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Climate action, Industry, innovation and infrastructure

Open Access status: hybrid

Estimated APC paid: $3,880