Environmental policy incentives to adopt advanced abatement technology: Will the true ranking please stand up?

We investigate incentives through environmental policy instruments to adopt advanced abatement technology. First, we study the case where the regulator makes long-term commitments to policy levels and does not anticipate arrival of new technology. We show that taxes provide stronger incentives than permits, auctioned and free permits offer identical incentives, and standards may give stronger incentives than permits. Second, we investigate scenarios where the regulator anticipates new technologies. We show that with taxes and permits the regulator can induce first-best outcomes if he moves after firms have invested, whereas this does not always hold if he moves first. (C) 2002 Elsevier Science B.V. All rights reserved.