Environmental policies to enhance technological change in the electricity sector

International agreements on climate change mitigation set quantitative carbon emission reduction targets in a country for a given year with respect to a given base year. A central question is then on what time do the new clean and costly technologies need to start functioning to comply with the agreed targets, and under what incentive does the market implement them. The planner's economic problem is to design an incentive that makes the new clean technology less costly than the vintage polluting facility, at the precise time in order to comply with the agreements at minimum cost.;Chapter 1 reviews the literature on efficient allocation of pollution, discussing its validity to explain induced technological change. It then presents a simple model of technological change showing that market power determes the optimal adoption time of a new technology.;Chapter 2 analyzes the effectiveness of carbon costs in accelerating technological change under different paths of technological progress. Furthermore, the paper examines the influence of market conditions. It shows that emission charges do reduce the firm's optimal adoption time when investment cost paths for the new technology are convex. On the contrary, emission charges may delay the optimal the switching time of a technology when the investment cost path is concave.;Chapter 3 explores the results of Chapter 2 in an agent-based model. Simulations of firms adjusting their output a la Cournot show that the effectiveness of carbon costs in accelerating technological change is highly dependant on the number of firms in the market. Moreover, the shape of the technological progress curve is determinant: the effects of carbon charges are not linear on carbon price, and become more uncertain the more concave the investment cost path is.;These results show that policies aiming at internalizing pollution costs enhance technological change at very different rates, depending on the actual market conditions in the industry and the dynamics of technological progress. This has profound implications in policy design: not only do carbon charges need to be used with precaution in oligopolistic industries, but also its effectiveness depends on the inner dynamics of cleaner technological alternatives.