Green taxes and uncertain timing of technological change

This paper concerns the role of environmental taxation in a model with endogenous technological change, where the latter implies that natural inputs become more productive. The timing of technological change is, in turn, uncertain and the likelihood of discovering the new technology is related to the amount of resources spent on R&D. The analysis is based on a dynamic general equilibrium model. One purpose of the paper is to design a policy so as to internalize the external effects arising from pollution and R&D. Another is to develop cost benefit rules for green tax reforms, when the initial equilibrium is suboptimal.