Tax Theory and Economic Analysis: Impact on Technological Change

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The environmental impacts of social and economic activity are strongly affected by the pace and trajectory of technological change. New technologies may reduce or mitigate polluting activities, or they may accelerate or facilitate increased pollution. Understanding the role of technological change is therefore an integral component in determining the environmental baseline against which to measure the effects of proposed policies. In global climate modeling, for example, assumptions about the role of technological change are often the single largest source of variance in emissions projections. In the context of environmental and climate policy, the induced effects of policies on technological change have substantial and varied implications for the normative and quantitative (e.g. cost-benefit) analyses of different policy options.

 

A diverse set of issues is associated with technological change and environmental tax policy, including: incentives for research and development; measurements of innovative inputs and outputs; diffusion of new technology; and the role of technological change in endogenous macroeconomic growth. Empirical evidence generally supports the theoretical finding that market-based instruments for environmental protection are likely to have a greater positive impact on the innovation and diffusion of environmentally friendly technologies.