On coordinating environmental policy and technology policy

Environmental and technology policies are generally administered by different government agencies and there seems to be little apparent coordination between the two bodies. This paper examines the consequences of independent actions by environmental and technology policy agencies on the behavior of a private monopolist. The current production technology generates pollution. The monopolist invests in R&D to possibly invent a new pollution-free technology. The government tries to control pollution externalities by imposing a per unit tax and it also provides a research subsidy. We find that pollution taxes are effective in reducing emissions only under certain circumstances. These taxes can, under certain circumstances, boost research spending. Existing tax levels seem to be a crucial determinant of the effectiveness of further tax increases. Higher research subsidies, on the other hand, unambiguously boost research spending and output (and consequently, emissions). Empirical evidence from OECD countries supports the complementarity between public and private research. However, our results do not show a statistically significant relation between government R&D outlays and pollution abatement spending, suggesting that in practice environmental and technology policies seem to not be coordinated. Policy implications are discussed.