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Permit Markets, Carbon Prices and the Creation of Innovation Clusters

Hans Gersbach () and Marie-Catherine Riekhof

VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy from Verein für Socialpolitik / German Economic Association

Abstract: Innovation clusters that combine public basic research and applied research performed by private firms may be needed for 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 induce countries to create such clusters. We allow for a varying degree of cooperation between the countries, represented by different carbon price targets. We find that a minimal carbon price is needed to attract applied research firms, but countries may nevertheless fail to invest in basic research. We construct a mechanism that can overcome this barrier and that can induce the first-best creation of innovation clusters. The mechanism involves a combination of few permits given to the country with the lowest costs for basic research, fair burden-sharing and maximal grandfathering.

Keywords: International permit markets; Carbon prices; Innovation clusters; Basic research; Applied R&D; Climate change mitigation; Externalities (search for similar items in EconPapers)
JEL-codes: H23 Q54 O32 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ene, nep-env, nep-ino and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc18:181611

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