Strong incentive to innovate.
Taxes increase the cost to a polluter of generating pollution, providing incentives for firms to develop new innovations and to adopt existing ones. For example, in the example above, the increased demand for more fuel-efficient and alternatively powered vehicles induced by fossil fuel taxes provides an important incentive for automakers to develop such vehicles and for consumers to adopt them. Under regulation-based approaches these incentives disappear once firms have complied with the regulated standard. Enhanced innovation lowers the cost to society of addressing environmental challenges in the long run. (This issue is further discussed in the related OECD brief “Taxation, Innovation and the Environment – A Policy Brief”.)