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

One important motivation for creating cap-and-trade programs for carbon emissions is the expectation that they will stimulate much-needed low-carbon innovation. I construct a new panel of British firms to investigate this hypothesis, finding that the European carbon market has encouraged greater low...

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Bibliographic Details
Published in:American economic journal. Economic policy 2020-08, Vol.12 (3), p.170-201
Main Author: Calel, Raphael
Format: Article
Language:English
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Summary:One important motivation for creating cap-and-trade programs for carbon emissions is the expectation that they will stimulate much-needed low-carbon innovation. I construct a new panel of British firms to investigate this hypothesis, finding that the European carbon market has encouraged greater low-carbon patenting and R&D spending among regulated firms without necessarily driving short-term reductions in carbon intensity of output. This stands in contrast to past cap-and-trade programs, which have primarily spurred adoption of existing pollution control technologies, with little effect on innovation. I discuss how to reconcile these contrasting findings and implications for the future of carbon markets.
ISSN:1945-7731
1945-774X
DOI:10.1257/POL.20180135