Are clean technology and environmental quality conflicting policy goals?

• We analyze clean technology adoption with endogenous output market and environmental regulation.
• The adoption of a clean technology does not always yield less pollution.
• A too strong environmental policy can be detrimental to clean technology adoption.
• We compare tax and permits in terms of welfare, technology adoption and environmental quality.

We analyze the effects of an environmental policy on the diffusion of a clean technology. Compared to previous articles we consider that the polluting firms are competitors on the output market and we analyze the effects of the policy on the share of adopting firms in the economy. We show that this share is not monotonic with the stringency of the environmental policy. We also compare the effects of an emission tax and tradable pollution permits and we show that, depending again on the stringency of the policy, either the tax or the permits yields a higher degree of technology adoption.