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Adopt or Innovate: Understanding Technological Responses to Cap-and-Trade

Raphael Calel

No 6847, CESifo Working Paper Series from CESifo Group Munich

Abstract: Environmental regulations have consistently been found to spur innovation in ‘clean’ technologies, with one significant exception. Past cap-and-trade programs have encouraged adoption of existing pollution control technologies, but had little effect on innovation. Several explanations have been offered, including secondary market failures and a lack of polluter sophistication. In this paper I argue that it likely has more to do with the state of the technologies. Using a newly constructed panel of British companies, I show that the European carbon market - the world’s largest cap-and-trade program - has, contrary to past experience, encouraged innovation rather than adoption. I discuss how these contrasting findings can be reconciled, and the implications for planned reforms.

Keywords: EU emissions trading system; induced innovation; directed technological change; technology diffusion (search for similar items in EconPapers)
JEL-codes: O30 Q55 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env, nep-ino and nep-reg
Date: 2018
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