Abstract:
We study the timing and interdependence between optimal innovation policy and environmental policy in a model with emission reduction (abatement) activity and costreducing R&D through increasing variety numbers. We find that optimal emission prices and R&D subsidies are substitutes over time. R&D subsidies for clean innovation should start high and fall over time, while optimal emission prices start low and go up. If the lifetime of patents is infinite, we replicate earlier results that suggest R&D policy to be independent of the stage of the environmental problem.