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Quota Markets and Technological Change

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  • Giulia Lechthaler-Felber
  • Frank C. Krysiak

Abstract

Quota or permit markets have become an important tool for climate and energy policy, as they not only promise allocative efficiency but also provide a market-based selection of the best new technological options. We analyze their effect on technological change in a case where several technologies could be developed and where R&D firms are granted patents with a finite lifetime. We show that R&D incentives are not only too low, as is well known, but incentives are also distorted across technologies, which is a new result. Compared to the social optimum, the best technology is developed in too few cases, whereas a less promising technology might be developed too often. This distortion is difficult to correct, as information about new technologies is usually missing. However, we show that combining a quota market with a simple tax-subsidy scheme can correct some of these distortions, even if the regulator has no information regarding the properties of new technologies.

Suggested Citation

  • Giulia Lechthaler-Felber & Frank C. Krysiak, 2017. "Quota Markets and Technological Change," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(4), pages 1199-1228.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/693136
    DOI: 10.1086/693136
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    Cited by:

    1. Yan, Yan & Li, Yi, 2023. "Regulation, external R&D, and strategic diffusion of pollution abatement technology," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 731-744.
    2. Grischa Perino & Maximilian Willner, 2019. "Rushing the Impatient: Allowance Reserves and the Time Profile of Low-Carbon Investments," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(2), pages 845-863, October.

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