Permit Markets, Carbon Prices and the Creation of Innovation Clusters

CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 18/303, November 2018

46 Pages Posted: 4 Dec 2018

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Marie-Catherine Riekhof

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich; University of Kiel

Date Written: November 9, 2018

Abstract

Innovation clusters combining public and private effort to develop breakthrough technologies promise 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 incentivize countries to create such clusters. We find that a minimal carbon price is needed to attract applied research firms, but countries may nevertheless fail to invest in complementary research infrastructure. We construct a mechanism that leads to innovation clusters. It is a combination of low permit endowments for the country with the lowest costs to build the needed infrastructure, compensation for this country by profits from permit trade, and maximal possible permit endowments for the remaining countries.

Keywords: International permit markets, Carbon prices, Innovation clusters, Research infrastructure, Applied R&D, Climate change mitigation, Externalities

JEL Classification: H23, Q54, O32

Suggested Citation

Gersbach, Hans and Riekhof, Marie-Catherine, Permit Markets, Carbon Prices and the Creation of Innovation Clusters (November 9, 2018). CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 18/303, November 2018 . Available at SSRN: https://ssrn.com/abstract=3281625 or http://dx.doi.org/10.2139/ssrn.3281625

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
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+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Marie-Catherine Riekhof

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

University of Kiel

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

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