The impact of emissions trading systems on technological innovation for climate change mitigation: a systematic review

Zihong Chen, Paul E. Brockway, Sheridan Few and Jouni Paavola

Climate Policy, 2025, vol. 25, issue 8, 1293-1309

Abstract: Addressing the increasingly urgent climate crisis requires a profound transformation of traditional high-emission technologies. Emissions trading systems (ETSs), as a typical market-based environmental policy instrument, are intended to incentivise technological innovation for climate change mitigation (TICCM). However, reviews of the evidence for this relationship are often methodologically unsystematic, analytically limited and vary in conclusions. In response, we establish a rigorous and transparent procedure to systematically review and synthesise evidence from 78 selected papers published between 2001 and 2023 on the impact of ETSs on TICCM. Our findings indicate that the European Union ETS (EU ETS) and China ETS (CN ETS) pilots exert positive and statistically significant impacts by incentivising technological investment, patenting, and the adoption of new technologies, despite some limited evidence of null or negative impacts. The heterogeneity of incentive impact in different industries and regions is the primary cause of divergent conclusions in the literature. Variations in the study periods and the subjects investigated account for part of the observed discrepancies. Although the incentive effect is significant, its extent is moderate and potentially weaker for long-term and radical TICCM impacts. The incentive effect is largely limited by insufficient stringency and high uncertainty of the ETSs. Coordinated efforts to address these limitations are crucial for bolstering the innovation incentives from the ETSs. Lastly, evidence of the impact of ETSs on TICCM remains incomplete. The limited focus on heterogeneity across industries, regions, and technologies, along with the lack of evaluation of recent incentive effectiveness, restricts a comprehensive understanding of ETS incentive effectiveness.Key policy insights The European Union ETS (EU ETS) and China ETS (CN ETS) pilots have generally provided positive and statistically significant incentives for multiple stages of technological innovation for climate change mitigation (TICCM).The incentives from the EU ETS and CN ETS pilots for TICCM remain moderate. Achieving climate goals will require enhancing the effectiveness of ETS-driven innovation incentives.The effectiveness of ETS incentives varies across regions and sectors. Sector- or region-specific adjustments are necessary to broaden the impact of these incentives.Collaboratively enhancing the stringency and reducing the uncertainty of the ETSs is a critical avenue for boosting incentives for TICCM.

Date: 2025
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DOI: 10.1080/14693062.2024.2443464

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