We consider the incentives of a single firm to invest in a cleaner technology under emission 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 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.

We examine the effects of trade liberalization in environmental goods in a model with one domestic downstream polluting firm and two upstream firms (one domestic, one foreign). The upstream firms offer their technologies to the downstream firm at a flat fee. The domestic government sets the emission tax rate after the outcome of R\&D is known. The effect of liberalization on the domestic upstream firm's R\&D incentive is ambiguous. Liberalization usually results in cleaner production, which allows the country to reach higher welfare. However this increase in welfare is typically achieved at the expense of the environment (a backfire effect).