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ABATEMENT TECHNOLOGY ADOPTION UNDER UNCERTAINTY

Published online by Cambridge University Press:  15 September 2009

Aude Pommeret  and
Katheline Schubert
Aude Pommeret*
Affiliation:
IREGE-Université de Savoie and HEC Lausanne
Katheline Schubert
Affiliation:
University Paris 1 Panthéon–Sorbonne and Paris School of Economics
*
Address correspondence to: Aude Pommeret, IMUS, Université de Savoie, Chemin de Bellevue, 74940 Annecy-le-Vieux, France; e-mail: aude.pommeret@univ-savoie.fr.
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Abstract

New technology has been credited with solving environmental problems by mitigating the effects of pollutants. We construct a general equilibrium model in which abatement technology is a real option and pollution's (negative) amenity value alters both risk aversion and the intertemporal elasticity of substitution. We derive the tax scheme such that in a decentralized economy agents adopt the abatement technology at the time that is socially optimal. We show that the higher the greenness of preferences, the earlier the adoption and the higher the optimal tax rate. We also obtain that adoption is fostered by uncertainty if the effective intertemporal elasticity of substitution is large enough, but is not affected by uncertainty if this elasticity is low. Moreover, the optimal tax rate, which only exists if the effective intertemporal elasticity of substitution is high, is an increasing function of uncertainty.

Keywords

Abatement TechnologyUncertaintyOptimal TimingPollution Tax
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 4 , September 2009 , pp. 493 - 522
Copyright
Copyright © Cambridge University Press 2009

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