Till Requate and Wolfram Unold were the winners of the 2004 Erik Kempe Award, for their article:
“Environmental Policy Incentives to Adopt Advanced Abatement Technology: Will the true Ranking Please Stand Up?”
published in European Economic Review 47, 125-146, 2003.
The Nomination Committee, composed by Thomas Aronsson, Scott Barrett, and Michael Rauscher, has awarded this paper for the following motivation:
This paper compares emission taxes, tradable emission permits and direct regulations from the point of view of incentives for firms to adopt new abatement technologies. It extends the existing literature in primarily two ways. The first is by reexamining a situation discussed in earlier literature, where the regulator commits to policy and does not anticipate the new technology. The second is by comparing the policy instruments also in case the regulator anticipates the new technology.
Previous studies in this area basically rely on calculating aggregate cost savings following from industry-wide adoption, whereas the point of departure in this paper is the decisions of individual firms to adopt the new technology in equilibrium. This change of focus is important because measures of aggregate cost savings in case all firms adopt a new technology provide no information about the incentives facing individual firms. The authors show that equilibrium aspects are crucial for the outcome of comparing the policy instruments from the point of view of firm incentives to invest in a new abatement technology. For instance, taxes tend to provide higher incentives than permits, since individual firms in the permit regime might free ride on falling permit prices following from the investment behavior of other firms. This means that the results from comparing the policy instruments depend on whether or not equilibrium aspects are properly recognized.
Requate and Unold receive the Erik Kempe award for their insightful theoretical characterization of how emission taxes, tradable emission permits and direct regulations contribute to the incentive structure facing individual firms. As such, the paper provides information about mechanisms that are crucial for our understanding of environmental policy. It also provides new insights into the old debate about market based instruments versus quantity control. Finally, the theoretical results derived in the paper are highly relevant also from a practical policy perspective. Therefore, the paper does not only contribute by an interesting theoretical analysis; it also contributes in a way that is directly relevant for practical policy design.