Emissions tax and second-mover advantage in clean technology R&D

Abstract This paper shows that under an emissions tax regime where firms have heterogenous capabilities in clean technology R&D, firms can acquire technology developed by rival firms at a lower cost than developing the technology in-house. In anticipation of such second-mover advantage in R&D, this creates an investment disincentive for technological innovators and resulted in lower social welfare relative to the case where firms’ technological competencies are homogenous and knowledge spillovers are equally shared. To resolve, the government can award a targeted subsidy, instead of a standard uniform subsidy, solely to the innovator to seed research.