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Incentives for innovation and adoption of new technology under emissions trading

Author

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  • Mandell, Svante

    () (vti - Swedish National Road & Transport Research Institute)

Abstract

A common claim in both the public and academic debate is that a tradable emission permits scheme does not provide sufficient incentives for R&D investments. The present paper addresses R&D investments and penetration rates of new technology focusing on the specific characteristics of a tradable permits market. It is showed that a complex dependency between the emissions cap, the market price for emission permits, the price for technology once it is developed and the R&D investment decision add an additional layer to the ‘traditional’ market failures associated with R&D. Even though the cap and how it is calibrated in response to the introduction of new technology is shown to be of importance both for the level of R&D investment and the technology’s penetration rate, we argue that the policy maker’s ability to use the cap to counter market failures in the R&D stage is limited. This is due to a dynamic inconsistency problem where the policy maker is unable to credibly commit to a future policy that is more stringent than motivated by efficiency concerns given the then existing technology. Such a policy may not be stringent enough to cover the necessary R&D investments.

Suggested Citation

  • Mandell, Svante, 2009. "Incentives for innovation and adoption of new technology under emissions trading," Working Papers 2009:10, Swedish National Road & Transport Research Institute (VTI).
  • Handle: RePEc:hhs:vtiwps:2009_010
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    File URL: http://www.transportportal.se/SWoPEc/Innovation_incentives_under_CnT_WP.pdf
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    More about this item

    Keywords

    Tradable permits; Innovation; R&D; Policy; Dynamic inconsistency;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • 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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