Do technology externalities justify restrictions on emission permit trading?

Abstract

a b s t r a c tInternational emission trading is an important flexibility mechanism, but its use has been often restricted on the ground that access to international carbon credits can undermine the domestic abatement effort reducing the incentive to innovate and, eventually, lowering the pace of climate policy-induced technological change. This paper examines the economics that is behind these concerns by studying how a cap to the trade of carbon offsets influences innovation, technological change, and welfare. By using a standard game of abatement and R&D, we investigate the main mechanisms that shape these relationships. We also use a numerical integrated assessment model that features environmental and technology externalities to quantify how limits to the volume, the timing, and the regional allocation of carbon offsets affect climate policy costs and the incentive to invest in innovation and lowcarbon technologies.Results indicate that, for moderate caps on the amount tradable emissions permits and sufficiently high technology spillovers, global innovation and technical change would increase and that this additional innovative effort could lead to economic efficiency gains. The numerical analysis confirms that when constraints are close ଝ This paper is part of the research carried out by the Sustainable Development Programme of Fondazione Enrico Mattei. Financial contribution from the PLANETS project funded by the European Commission under the 7th framework programme is gratefully acknowledged. The usual disclaimer applies. We would like to especially thank Prof. Sjak Smulders for the many comments and suggestions which have helped to considerably improve this manuscript.*

Emission Certificate Trade and Costs Under Regional Burden-Sharing Regimes for a 2°c Climate Change Control Target

“…We therefore conduct a sensitivity analysis, and study what may happen to the overall quantities of carbon certificate trade if emission allowances are allocated according to a specific burden-sharing regime but with constrained possibilities to trade permits on an international market. Similar research has been conducted by De Cian and Tavoni (2012), who researched restrictions in carbon certificate trade and their implications for technological innovation and low-carbon technology deployment. Contrary to their study, however, we here assume fixed exogenous technology cost reduction rates and do not assess interdependencies between certificate trade and technological learning.…”

“…Comparative assessments of different burden-sharing principles have also been conducted, for instance, by den Elzen et al (2008), den Elzen and Höhne (2010), Hof et al (2008), Jacoby et al (2008), and Ciscar et al (2013). Subjects like the linkage between trade of emission allowances and technological innovation, as well as the coupling of different certificate markets, have especially been analyzed in Driesen (2003), Babiker et al (2004), de Sépibus (2008), andDe Cian andTavoni (2012). The two different burden-sharing schemes analyzed in this article relate to population development (referred to as "resource-sharing" scheme) respectively climate policy costs and economic development (the so-called "effort-sharing" scheme).…”

Cost Concepts for Climate Change Mitigation

“…It has been shown that interaction of different policies (for example, emissions constraints, renewable electricity requirements, and fuel efficiency standards for automobiles) may lead to increased or decreased costs that are sometimes not visible to consumers (Fawcett et al, 2013). The assumptions about technological learning, and generally the modeling of induced technology progress enabled by decarbonization strategies, have significant implications on the estimation of mitigation costs in a macroeconomic context (as illustrated in Capros et al, 2012;Bosetti et al, 2011;De Cian and Tavoni, 2012;Löschel and Schymura, 2013).…”

On the mechanism of international technology diffusion for energy technological progress

“…For example, some studies build on multi-region, multi-sector computable general equilibrium (CGE) models to examine the impact of ITD for energy/climate issues (e.g., Gerlagh and Kuik, 2007;Hübler 2011;Leimbach and Baumstark, 2010;Leimbach and Edenhofer, 2007;Leimbach and Eisenack, 2009). Others choose Integrated Assessment Model (IAM) as the platform to investigate the potential of international knowledge spillovers for global energy/carbon savings (e.g., Buonanno et al, 2003;Bosetti et al, 2008Bosetti et al, , 2011De Cian and Tavoni, 2012;Parrado and De Cian, 2014).…”