Green Taxes, R&D Investments, and Emission Abatement
A more restrictive abatement policy hurts economic welfare more in the short term while boosting economic welfare in the long term.
We explore how energy tax influences energy research and development (R&D) investments, which further affect economic welfare, carbon emissions, and climate change under various emission abatement policies. Energy tax, as a market-based instrument, aims to adjust the energy R&D investments to the optimal level. We consider two types of energy tax, the optimal energy tax and the Pigovian tax. The optimal energy tax contains the scarcity rent and the carbon tax, while the Pigovian tax only considers the carbon tax. Setting the energy tax equal to the Pigovian tax appears to be insufficient, leading to suboptimal outcomes. The impact is more significant before the energy use transits from fossil fuels to backstop technology, while the impact is moderate after the backstop technology fully replaces fossil fuels. We show that the suboptimal outcomes are worse with a more restrictive abatement policy, while they are moderate under a less stringent abatement policy.
WORKING PAPER NO: 1187