Scandinavian Working Papers in Economics

Working Papers,
Swedish National Road & Transport Research Institute (VTI)

No 2009:10: Incentives for innovation and adoption of new technology under emissions trading

Svante Mandell ()
Additional contact information
Svante Mandell: vti - Swedish National Road & Transport Research Institute, Postal: Dept. of Transport Economics, P.O. Box 55685, SE-102 15 Stockholm, Sweden

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

JEL-codes: L51; O31; Q55; Q58

21 pages, October 9, 2009

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Innovation_incentives_under_CnT_WP.pdf PDF-file 

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