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Double Free-Riding in Innovation and Abatement: A Rules Treaty Solution

Hans Gersbach (), Quirin Oberpriller () and Martin Scheffel ()
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Quirin Oberpriller: CER-ETH - Center of Economic Research at ETH Zurich
Martin Scheffel: CMR - Center for Macroeconomic Research at University of Cologne, Albertus-Magnus-Platz

Environmental & Resource Economics, 2019, vol. 73, issue 2, 449-483

Abstract: Abstract In addressing climate change, both abatement itself and the innovation of superior abatement technologies are exposed to free-riding. To examine this double free-riding problem, we develop a multi-country model with an international market for emission permits and licenses for abatement technologies. We show that the two problems are mutually reinforcing. To address the double free-riding problem we propose a rules treaty for innovation and abatement that consists of two rules, an allocation rule and a refunding rule. The allocation rule determines the share of issued emission permits that each country can directly allocate to its domestic firms, while the remainder is handed over to an international agency. The refunding rule determines how the agency’s revenues from selling these permits to firms are redistributed. A fraction is given to those countries that successfully develop superior abatement technologies provided they license the technology free of charge to all countries. The remaining revenues are redistributed to all countries. These rules can approximate globally optimal abatement and innovation levels.

Keywords: Rules treaty; Climate change; Global refunding scheme; International permit markets; Technological innovation; Patent; Licensing (search for similar items in EconPapers)
JEL-codes: H23 H41 O32 O34 Q54 (search for similar items in EconPapers)
Date: 2019
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