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Carbon Markets and Technological Innovation

  • Weber, T.A.
  • Neuhoff, K.

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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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0932.pdf
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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
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
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  7. Denicolo, Vincenzo, 1999. "Pollution-Reducing Innovations under Taxes or Permits," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 184-99, January.
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  13. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
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  18. repec:cup:cbooks:9780521322249 is not listed on IDEAS
  19. Lawrence H. Goulder & Ian W. H. Parry, 2008. "Instrument Choice in Environmental Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(2), pages 152-174, Summer.
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