Preventing Environmental Disasters : Market-Based vs. Command-and-Control Policies

The paper compares the effects of market-based and command-and-control climate policies on the direction of technical change and the prevention of environmental disasters. Drawing on the model proposed in Acemoglu et al. (2012), we show that market-based policies (carbon taxes and subsidies towards clean sectors) exhibit bounded window of opportunities: delays in their implementation make them completely ineffective both in redirecting technical change and in avoiding environmental catastrophes. On the contrary, we find that command-and-control interventions guarantee policy effectiveness irrespectively on the timing of their introduction. As command-and-control policies are always able to direct technical change toward "green" technologies and to prevent climate disasters, they constitute a valuable alternative to market-based interventions