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Climate Policy and Innovation in the Absence of Commitment / Datta, Ashokankur and E. Somanathan. Belfer Center for Science and International Affairs, Jan. 2011, Discussion Paper 11-45, 54 p.http://belfercenter.ksg.harvard.edu/files/SomanathanDiscussionPaper45-Jan-2011.pdfIt is well-recognized that new technology is a crucial part of any  solution to the problem of climate change. But since investments in  research and development take time to mature, price and quantity  instruments, i.e., carbon taxes and cap-and-trade, run into a commitment  problem. We assume that the government cannot commit to the level of a  policy instrument in advance, but sets the level to be optimal ex-post.  Under these assumptions, we show that when the supply curve of dirty  (emission-producing) energy is flat, then an emissions tax is  ineffective in promoting R &#38; D into green (emission-free) energy  while an emissions quota (i.e., cap and trade) can be effective. A  subsidy to R &#38; D is welfare-reducing. More realistically, when the  supply curve of dirty energy is upward-sloping, then both tax and quota  regimes can be effective in promoting R &#38; D into emission-free  technology. In this case, a tax generally induces more R &#38; D than a  quota. When the supply curve is sufficiently steep compared to the  demand curve, a subsidy to R &#38; D can expand the range of parameter  values under which R &#38; D occurs and this can be welfare-improving.  If there is sufficient uncertainty about whether a climate policy will  be adopted ex-post, then subsidizing R &#38; D is an even more  attractive policy option since a welfare-improving subsidy to R &#38; D  exists under a wider range of circumstances. (© Belfer Center)