Drivers of environmental innovation - Vinnova

according to Hemmelskamp (Forthcoming), reflect the lively debate on
environmental taxes at the time. The results seem to show that economic
instruments have advantages in the case of environmental product innovations,
but that there are no general advantages of one type of instrument over another
related to environmental process innovations (Hemmelskamp, Forthcoming).
A common criticism against environmental taxation is that countries, which
unilaterally adopt such policy measures, lose competitiveness. Carraro and
Galeotti have reviewed studies that provide additional critical remarks. On the
grounds of efficiency, emission permits have been shown to improve on
emission charges when the inter-temporal decisions of agents, particularly on
innovation, cannot be neglected. Moreover, when more than one externality has
to be accounted for, environmental taxation must be combined with other
policy instruments to achieve the social optimum. Information asymmetries
(such as in non-point source pollution problems) invite policy interventions that
are far more complex than environmental taxation (Carraro and Galeotti, 1997).
A tax and its related revenue can be directed to foster technological innovation,
but Carraro and Galeotti point to some recent analysis that shows that
environmental taxes or emission permits are likely to be sub-optimal
instruments for achieving an adequate level of technological innovation.
Studies have shown that, in a dynamic framework, taxes or permits can lead to
the over investment in environmental innovation (Carraro and Galeotti, 1997).
Charges
Charges stimulate voluntary and individual adaptations in order to prevent or
reduce environmental impacts. Quite simply, the bigger the cost advantage of
innovating as compared to paying the charges the greater the incentive to
innovate. The political process of fixing the rate of the charges is, however,
difficult. Finding the most effective level presupposes information on the
marginal avoidance costs of all polluters, information that in real life does not
exist. Rather trial-and-error methods are used, and this hampers efficiency
(Hemmelskamp, 1997).
Tradable permits
The term tradable permits refers to deliberately created markets where actors
buy and sell “rights” or permits for actual or potential pollution.
There are two basic models on how to construct a system of tradable
permits/reductions: the cap and trade model and the baseline and credit
model.
The cap and trade model defines a total ceiling of pollution from polluters
included withn a system. The total amount of pollution in the pollution cap is
divided between the polluters. The shares allocated to the polluters could be
given out free of charge or be auctioned off. At the end of the period that is to
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