We consider the incentives of a single firm to invest in a cleaner technology
under quotas and emission taxation. We assume asymmetric information
about the firm’s cost of employing the new technology. Policy is set either before
the firm invests (commitment) or after (time consistency). Contrary to the conventional
wisdom, we find that with commitment (time consistency), quotas give
higher (lower) investment incentives than taxes. With quotas (taxes), commitment
generally leads to higher (lower) welfare than time consistency. Under commitment
with quadratic abatement costs and environmental damages, a modified Weitzman
rule applies and quotas usually lead to higher welfare than taxes.

• doption incentives and environmental policy timing under asymmetric information and strategic firm behaviour