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Carbon Markets and Technological Innovation

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  • Weber, T.A.
  • Neuhoff, K.

Abstract

This paper examines the effects of firm-level innovation in carbonabatement technologies on optimal cap-and-trade schemes with and without price controls. We characterize optimal cap-and-trade regulation with a price cap and price floor, and compare it to the individual cases of pure taxation and simple emissions cap. Innovation shifts the trade-off between price- and quantity-based instruments towards quantity-based emissions trading schemes. More specifically, an increase in innovation effectiveness lowers the optimal emissions cap, and leads to relaxed price controls unless the slope of the marginal environmental damage cost curve is small. Because of the decrease in the emissions cap, innovation in abatement technologies can lead to a higher expected carbon price, so as to provide sufficient incentives for private R&D investments. The expected carbon price decreases once innovative technologies are widely used.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0932.

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Date of creation: 30 Aug 2009
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Handle: RePEc:cam:camdae:0932

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Carbon Emissions; Carbon Taxes; Cap-and-Trade; Environmental Regulation; Induced Technological Innovation; Price Caps; Price Floors; Prices vs. Quantities;

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References

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Citations

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Cited by:
  1. Raphael Calel, 2011. "Market-based instruments and technology choices: a synthesis," Grantham Research Institute on Climate Change and the Environment Working Papers 57, Grantham Research Institute on Climate Change and the Environment.
  2. Robert N. Stavins, 2010. "The Problem of the Commons: Still Unsettled after 100 Years," Working Papers 2010.131, Fondazione Eni Enrico Mattei.
  3. Castillo, Anya & Linn, Joshua, 2011. "Incentives of carbon dioxide regulation for investment in low-carbon electricity technologies in Texas," Energy Policy, Elsevier, vol. 39(3), pages 1831-1844, March.
  4. Fell, Harrison & Burtraw, Dallas & Morgenstern, Richard D. & Palmer, Karen L., 2012. "Soft and hard price collars in a cap-and-trade system: A comparative analysis," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 183-198.
  5. Zafirakis, Dimitrios & Chalvatzis, Konstantinos J. & Baiocchi, Giovanni & Daskalakis, George, 2013. "Modeling of financial incentives for investments in energy storage systems that promote the large-scale integration of wind energy," Applied Energy, Elsevier, vol. 105(C), pages 138-154.
  6. Stranlund, John K. & Moffitt, L. Joe, 2014. "Enforcement and price controls in emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 67(1), pages 20-38.
  7. Larson, Donald F. & Dinar, Ariel & Frisbie, J. Aapris, 2011. "Agriculture and the clean development mechanism," Policy Research Working Paper Series 5621, The World Bank.
  8. Douglas, Stratford & Nishioka, Shuichiro, 2012. "International differences in emissions intensity and emissions content of global trade," Journal of Development Economics, Elsevier, vol. 99(2), pages 415-427.
  9. Tim Laing & Misato Sato & Michael Grubb & Claudia Comberti, 2013. "Assessing the effectiveness of the EU Emissions Trading System," Grantham Research Institute on Climate Change and the Environment Working Papers 106, Grantham Research Institute on Climate Change and the Environment.
  10. Andrew Yates, 2012. "On a Fundamental Advantage of Permits Over Taxes for the Control of Pollution," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 51(4), pages 583-598, April.
  11. Xiao Chen & Alan Woodland, 2013. "International trade and climate change," International Tax and Public Finance, Springer, vol. 20(3), pages 381-413, June.
  12. Larson, Donald F. & Dinar, Ariel & Blankespoor, Brian, 2012. "Aligning climate change mitigation and agricultural policies in Eastern Europe and Central Asia," Policy Research Working Paper Series 6080, The World Bank.
  13. Federico Boffa & Stefano Clò & Alessio D'Amato, 2013. "Environmental policy and incentives to adopt abatement technologies under endogenous uncertainty," Working Papers 5, Department of the Treasury, Ministry of the Economy and of Finance.

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