Incentives for technological development: BAT is bad

This paper examines the effect of environmental regulation on a firm's incentives to invest in developing cheaper (clean-up) technologies in a model where consumers are willing to pay for environmentally clean technologies. It focuses on two types of policies: a BAT based policy and a commitment policy. In the former policy, the standard is based on the best available technology (BAT) where the regulator re-optimizes environmental regulation in response to new technologies. However, under a commitment policy, the regulator announces a regulation and sticks to it irrespective of the firm's adopted technology. The paper finds that cleaner technologies are not adopted if the regulator announces a BAT based policy. A commitment policy not only leads to positive investment in research and development but is also welfare improving.