We investigate the interplay between environmental policy, incentives to adopt new technology, and repercussions on R&D. We study a model where a monopolistic upstream firm engages in R&D and sells advanced abatement technology to polluting downstream firms which are subject to regulation. We consider for different timing and commitment regimes of environmental tax and permit policies: ex post taxation (or issuing permits) ex interim commitment to a tax rate (a quota of permits) after observing R&D success but before adaption, and two types of ex ante commitment before R&D activity. We study the second best tax and permit rules and rank the policies with respect to welfare.
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