Some insights on strategic environmental policies in an open economy.
Silvia Concettini, Anna Creti and Jean-Pierre Ponssard
This article aims at contributing to the literature on strategic environmental policy in the context of an open economy when several market failures are present, including the environmental externalities. We consider a model in which two or more countries pursue business and environmental objectives using environmental policy instruments such as subsidies which can be differentiated or absent in some countries (see Benoot and Proost, 2014; Fischer et al., 2014). The literature has highlighted as in this context a central planner would choose a higher level of subsidies compared to the non-cooperative equilibrium. We seek to extend existent analyses in two directions. On one side we want to study the sensitivity of previous models’ results to the assumptions about the cost structure for the development of a new technology, the structure and the localization of the demand, and the presence of competing new technologies (e.g. production technologies versus storage technologies). On the other side we seek to evauate how results of existing models would change when innovative financing instruments (e.g. project financing, green funds) are offered in alternative to traditional financing instruments and if their relative desirability could be affected in an open economy setting.
Competing green technologies and the dynamic of transition
Guy Meunier, Michel Moreaux and Jean-Pierre Ponssard
In many sectors (e.g. electricity, transports), several technologies are good candidate to replace the current CO2 emitting ones. These technologies benefit from varying public supports, more or less discriminatory. The objective of the project is to understand under which conditions substitute low carbon technologies should co-exist or not. We are particularly interested by the temporal aspect of the question. The possible existence of a transitory phase of co-existence and the influence of investment inertia (modelled by adjustment costs) on the mid and long-term technology mix.
Financing innovative green projects with asymmetric information and costly public funds
Guy Meunier and Jean-Pierre Ponssard.
The energy transition requires the deployment of significant programs in research and development. In absence of a long-term commitment by governments on an international price of carbon various forms of national subsidies have been used. This paper analyzes the potential benefit of using subsidies conditional on success or failure of an R&D program, rather than a flat subsidy. The relationship between the state and the firm is formalized in the principal agent framework. Three potential sources of inefficiency are identified: conditions of observability of the outcome of the project, adverse selection regarding the probability of success and moral hazard. We shall show how subsidies that reward failure and subsidies that reward success mitigate these respective sources of inefficiency in a superior way as compared to flat subsidies. The gap between our second-best policies and the first best is also identified. We bring together our analytical results and offer some guidance for the design of contractual inestment programs such as the contractual instruments used in the Investment Program for the Future (Programme d’Investissements d’Avenir) launched in France in 2010 to promote R&D for the energy transition over the period 2010-2020.