UCLA Anderson Assistant Professor of Economics Leo Bursztyn's paper "The Environment and Directed Technical Change" recently attracted the attention of The Economist. He and his co-authors (Phillipe Aghion and David Hemous of Harvard University) and Daron Acemoglu of the Massachusettes Institute of Technology) studied the various ways government interventions might impact growth and innovation in industies that potentially degrade the environment.
With a bit of whimsy, the authors named some of the various approaches to government policy. The Nordhaus approach suggests that "only limited and gradual government inverventions are necessary and that optimal regulations should only reduce long-run growth by a modest amount; The Stern/Al Gore approach is less optimistic, calling for "more extensive and immediate interventions, and argues that these interventions need to be in place permanently and will likely reduce long-run grwoth as the price for avoiding an environmental disaster; and the more pessimistic Greenpeace answer is that "essentially all growth needs to come to an end in order to save the planet."
Yesterday, Bursztyn spoke to the UCLA Anderson Blog about the work.
Bursztyn said that much of the prior literature was lacking in analysis of how economic structure of innovation responds to change in ecomomic policy in that there were cost-benefit analysis of envirionment policies in which people assumed that the structure of economic progress is a given, that there is only one type of economic progress. This paper created a framework that took at theorerical look at different responses to different economic policies.
Ultimately, Bursztyn and his co-authoers found that temporary interventions worked better than permanent interventions (translation: a temporary carbon tax as opposed to a permanent carbon tax) because market forces will come into play. As example, Bursztyn suggested considering two ways to build a single product. One way dirties the environment, the other is clean (or cleaner). If the "dirty" method is more profitable, then innovation will continue based on that technology. But if an intervention, such as a tax, makes the "cleaner" method more profitable, then industry will begin to use this method and innovation will follow along this path. This is why only a temporary intervention is necessary, because once innovation is based on the cleaner technology, then market forces will sustain it.
Another finding of the paper is that the greater the delay in implementing the innovation, a longer and harder intervention is necessitated.
Finally, in addition to government interventions on "dirty" technology, government subsidies on research and development are also essential. Bursztyn says this "knowledge externalitiy" is the key finding, as the longer you support innovation in clean technology, the wider the gap in profitability. Then, market forces take over.
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