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Carbon Markets and Technological Innovation

Thomas A. Weber

Ecole Polytechnique Federale de Lausanne - MTEI

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

June 21, 2010

This paper examines the effects of firm-level innovation in carbon-abatement 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.

Number of Pages in PDF File: 25

Keywords: Carbon Emissions, Carbon Taxes, Cap-and-Trade, Environmental Regulation, Induced Technological Innovation, Price Caps, Price Floors, Prices vs. Quantities

JEL Classification: H23, Q28, Q54, Q55, Q58

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Date posted: January 26, 2009 ; Last revised: May 24, 2014

Suggested Citation

Weber, Thomas A. and Neuhoff, Karsten, Carbon Markets and Technological Innovation (June 21, 2010). Available at SSRN: http://ssrn.com/abstract=1333244 or http://dx.doi.org/10.2139/ssrn.1333244

Contact Information

Thomas A. Weber (Contact Author)
Ecole Polytechnique Federale de Lausanne - MTEI ( email )
Station 5
Lausanne, 1015
+41 (0)21 693 01 41 (Phone)
+41 (0)21 693 00 20 (Fax)
HOME PAGE: http://oes.epfl.ch
Karsten Neuhoff
German Institute for Economic Research (DIW Berlin) ( email )
Mohrenstraße 58
Berlin, 10117
Feedback to SSRN

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References:  54
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