Behavioral and Distributional Effects of Environmental Policy

Abstract

Over the last 10 years, a significant literature has developed on the effects of environmental policy on the incentives for firms to undertake research and development (R&D) that will lead to the development of new environmentally friendly products and/or processes.In what follows, we refer to this as environmental R&D.The starting point of this literature is the recognition that market forces will produce very weak incentives for firms to undertake environmental R&D, and so government incentives are required to correct this market failure.There have been three main strands in this literature.The first 1 examines the effects of environmental policy (e.g., taxes and standards) on the incentives to undertake R&D.An important point that emerges from this literature is that while environmental policy does indeed give firms an incentive to undertake environmental R&D, a toughening of this policy will not necessarily increase the amount of R&D.This is because while a tougher environmental policy will have a direct effect of encouraging more environmental R&D, it can also have the indirect effect of raising costs and reducing output, and this will lower R&D incentives.Thus, contrary to the widely discussed Porter hypothesis, there is no theoretical presump-Yannis Katsoulacos is professor of economics at the Athens University of Economics and Business.Alistair Ulph is deputy vice-chancellor and professor of economics at the

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