Journal
RESOURCE AND ENERGY ECONOMICS
Volume 28, Issue 2, Pages 160-180Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.reseneeco.2005.08.002
Keywords
profit-maximization; research & development; uncertainty; investment
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This paper determines a firm's profit-maximizing R&D response to an uncertain carbon tax, for two different R&D programs: cost reduction of low carbon energy technologies and emissions reductions of currently economic technologies. We find that optimal R&D does not increase monotonically in a carbon tax. R&D into alternative technologies increases only if the firm is flexible enough; R&D into conventional technologies first increases then decreases in a carbon tax. Firms that are very flexible may increase R&D into alternative technologies when the uncertainty surrounding a carbon tax is increased; otherwise firms will generally decrease R&D investment in uncertainty. (c) 2005 Elsevier B.V. All rights reserved.
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