Green Technology and Patents in the Presence of Green Consumers

We develop a theoretical framework to investigate the impact of patent policies and emission taxes on green innovation that reduces the emission-output ratio, and on the emission level. In the absence of green consumers, the introduction of patents results in a paradox whereby increasing emission tax beyond a certain threshold leads to a discrete increase in the emission level, which may be avoided by reducing the patenting cost. In the presence of green consumers, this paradox is restricted to an intermediate range of tax rates, and at sufficiently high tax rates, reducing the patenting cost may increase the emission level. Also, higher emission taxes increase green investment only if the fraction of green consumers is sufficiently small, and the magnitude of this effect decreases as this fraction increases. Moreover, a stricter patentability requirement is only effective at reducing emissions if the fraction of green consumers is sufficiently small.