The Effects of Emission Taxes on Pollution through the Diffusion of Clean Technology:The Presence of Green Consumers

We analyze how the implementation of an emission tax influences aggregate pollution through the diffusion of a new, less polluting technology. Our focus is on how the consumption behavior of green consumers changes the relationship between policy stringency and the equilibrium state of technology diffusion or the ranking of the states of technology diffusion (i.e., full, partial, and no diffusion) in terms of aggregate pollution. We find that emission taxes should not be too high for an “efficient full-diffusion equilibrium” to emerge, in which the full diffusion of the new technology occurs in equilibrium and attains the lowest level of aggregate pollution. If the emission tax is high, aggregate pollution may be lowest in the no diffusion scenario. In addition, the presence of green consumers narrows the range of emission taxes and degree of the new technology that leads to the efficient full-diffusion equilibrium and widens the range of parameters for which aggregate pollution is lowest in the no diffusion case.