Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 03/2006: Endogenous technology and tradable emission quotas

Rolf Golombek () and Michael Hoel ()
Additional contact information
Rolf Golombek: The Ragnar Frisch Centre for Economic Research, Postal: Gaustadalléen 21, N-0349 Oslo, Norway
Michael Hoel: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Abstract: We study an international climate agreement that assigns emission quotas to each participating country. Unlike the simplest models in the literature, we assume that abatement costs are affected by R&D activities undertaken in all firms in all countries, i.e. abatement technologies are endogenous. In line with the Kyoto agreement we assume that the international climate agreement does not include R&D policies. We show that for a secondbest agreement, marginal costs of abatement should exceed the Pigovian level. Moreover, marginal costs of abatement differ across countries in the second-best quota agreement with heterogeneous countries. In other words, the second-best outcome cannot be achieved if emission quotas are tradable.

Keywords: Climate policy; international climate agreements; emission quotas; technology spillovers

JEL-codes: H23; O30; Q20; Q25; Q28

16 pages, February 17, 2006

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