Carbon Markets and Technological Innovation

25 Pages Posted: 26 Jan 2009 Last revised: 24 May 2014

Thomas A. Weber

Ecole Polytechnique Federale de Lausanne - MTEI

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

Date Written: June 21, 2010

Abstract

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.

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

Suggested Citation

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

Thomas A. Weber (Contact Author)

Ecole Polytechnique Federale de Lausanne - MTEI ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland
+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 )

Mohrenstra├če 58
Berlin, 10117
Germany

Paper statistics

Downloads
374
Rank
64,508
Abstract Views
1,438