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Carbon Markets and Technological Innovation

Author

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  • Thomas A. Weber

    (Stanford University,USA)

  • Karsten Neuhoff

    (University of Cambridge, Cambridge)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Thomas A. Weber & Karsten Neuhoff, 2009. "Carbon Markets and Technological Innovation," Working Papers EPRG 0917, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg0917
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    References listed on IDEAS

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    More about this item

    Keywords

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

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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