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Permit Markets, Carbon Prices and the Creation of Innovation Clusters

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  • Gersbach, Hans
  • Riekhof, Marie-Catherine

Abstract

Innovation clusters that combine public basic research and applied research performed by private firms may be needed for greater technological advances to slow down climate change. We use a multi-country model with emissions permit trade to examine how international climate policy can induce countries to create such clusters. We allow for a varying degree of cooperation between the countries, represented by different carbon price targets. We find that a minimal carbon price is needed to attract applied research firms, but countries may nevertheless fail to invest in basic research. We construct a mechanism that can overcome this barrier and that can induce the first-best creation of innovation clusters. The mechanism involves a combination of few permits given to the country with the lowest costs for basic research, fair burden-sharing and maximal grandfathering.

Suggested Citation

  • Gersbach, Hans & Riekhof, Marie-Catherine, 2018. "Permit Markets, Carbon Prices and the Creation of Innovation Clusters," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181611, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc18:181611
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    References listed on IDEAS

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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    2. Hans Gersbach & Ulrich Schetter & Maik T Schneider, 2019. "Taxation, Innovation and Entrepreneurship," Economic Journal, Royal Economic Society, vol. 129(620), pages 1731-1781.
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    6. Martin L. Weitzman, 2014. "Can Negotiating a Uniform Carbon Price Help to Internalize the Global Warming Externality?," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(1), pages 29-49.
    7. Hans Gersbach & Marie-Catherine Riekhof, 2017. "Technology Treaties and Climate Change," CER-ETH Economics working paper series 17/268, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
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    More about this item

    Keywords

    International permit markets; Carbon prices; Innovation clusters; Basic research; Applied R&D; Climate change mitigation; Externalities;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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