Environmental Policy Instruments: Technology Adoption Incentives with Imperfect Compliance

In this paper, we study the incentives to adopt advanced abatement technologies in the presence of imperfect compliance. Surprisingly, incentives to adopt advanced abatement technologies remain intact under emission taxes and pollution abatement subsidies when compared to the perfect compliance scenario. However, under emission standards imperfect compliance increases firms’ incentives to invest under certain assumptions, whereas under an emission permit mechanism investment incentives decrease only if widespread non-compliance induces a (sufficient) reduction in the permit price. Our results are valid for fairly general characteristics of the monitoring and enforcement strategies commonly found in both, theoretical and empirical applications.