Incentives for innovation and adoption of new technology under emissions trading

Svante Mandell

No 2009:10, Working Papers from Swedish National Road & Transport Research Institute (VTI)

Abstract: A common claim in both the public and academic debate is that a tradable emission permits scheme does not provide sufficient incentives for R&D investments. The present paper addresses R&D investments and penetration rates of new technology focusing on the specific characteristics of a tradable permits market. It is showed that a complex dependency between the emissions cap, the market price for emission permits, the price for technology once it is developed and the R&D investment decision add an additional layer to the ‘traditional’ market failures associated with R&D. Even though the cap and how it is calibrated in response to the introduction of new technology is shown to be of importance both for the level of R&D investment and the technology’s penetration rate, we argue that the policy maker’s ability to use the cap to counter market failures in the R&D stage is limited. This is due to a dynamic inconsistency problem where the policy maker is unable to credibly commit to a future policy that is more stringent than motivated by efficiency concerns given the then existing technology. Such a policy may not be stringent enough to cover the necessary R&D investments.

Keywords: Tradable permits; Innovation; R&D; Policy; Dynamic inconsistency (search for similar items in EconPapers)
JEL-codes: L51 O31 Q55 Q58 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2009-10-09
New Economics Papers: this item is included in nep-env, nep-ino, nep-ipr, nep-pr~ and nep-mic
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