Technology Licensing and Environmental Policy Instruments: Price Control versus Quantity Control

This paper analyzes technology spillover through the licensing of an abatement technology under the Pigouvian taxation and emission trading schemes. We demonstrate that a firm with a better abatement technology sells a per unit royalty license to a competitor under both schemes, but it offers a higher royalty rate under the latter, which, unless the technology is perfectly transferrable, strictly outperforms the former in terms of social surplus and incentives for technology investment by inducing more (less) production by the licensor (licensee). These are reversals of the welfare implications suggested by the literature that assumes free technology transfer.