Taxes versus permits as incentive for the intertemporal supply of a clean technology by a monopoly

• Are emission taxes or permits better suited to incentivize monopolistic supply of a clean technology?
• Prices and quantities are equivalent in most but not all of the cases.
• The environmental policy eliminates monopoly power ex post by charging the ex post efficient tax.
• This introduces however an intertemporal distortion: too little of the clean technology.
• An important exception is the case of non-competitive supply of the dirty input where taxes dominate permits.

This paper investigates the intertemporal monopolistic supply of a clean technology and addresses the following questions: How does the lack of governments to commit restrict the incentives and thereby the supply of clean technologies? Are either emission taxes or emission permits better suited in such a dynamic setting? Although the monopoly can be forced to price taking behaviour, the inability of governments to commit leads to too slow and to too little expansion. Prices and quantities are equivalent for different kinds of government's objectives. An (important) exception is the case of non-competitive supply of the dirty input: taxes dominate from a welfare perspective however due to the additional scope to accrue rents and not due to an improvement of incentives for the development of clean technologies. Permits eliminate pollution entirely, which fosters the expansion of the clean technology.