Cap and Trade’s Implications for Technology Innovation

Margaret Taylor of the Richard and Rhoda Goldman School of Public Policy of University of California has published a new study on the relationship between cap-and-trade programs (CTPs) and innovation that would serve as an excellent reading in a climate policy course. Among the take-aways of the study, which assessed the impact of CTPs for sulfur dioxide (under IV of the Clean Act Act Amendments of 1990) and the Ozone Transport Commission nitrous oxide Budget Program (OTC/NBP) in the United States:

  1. Expected allowance prices for Title IV CAA and the the OTC/NBP were generally higher than actual prices observing during trading; this resulted in an incentive to bank allowances or purchase additional allowances (including banking of 75% of Title IV Phase I allowances being banked for future use rather than being traded);
  2. Emissions never exceeded allowances during Phase II of the OTC NBP program, and only in two years through the entire course of the program;
  3. Lower than expected allowance prices during Phase I of Title IV of the CAA resulted in cancellation of some technologically-oriented abatement options, such as flue gas desulfurization;
  4. Innovators in the CTPs assessed in the study decided during the respective trading periods that R&D investments should be curtailed, based on assessment of future market conditions. As a consequence, Taylor concluded that “CTPs do not inherently provide sustained incentives for private sector R&D investments in clear technologies, but may add to the uncertainty inherent in inventive activity.”
  5. While some commentators have suggested that price-stabilization options could help; however, this may impact other elements of CTP design, e.g. how to treat offsets, and other policy efforts that may influence demand-pull or supply-push, e.g. emissions standards.

Among the discussion questions this reading could generate in classes include the following:

1. Are alternative market-based strategies, e.g. carbon taxes, more likely to help drive technology innovation and adoption?;

2. Are cap and trade programs inherently prone to allocation of excessive allowances due to political pressures?;

3. Would elimination of banking provisions in CTPs be salutary in terms of driving innovation? What downsides would such a proposal pose?

 

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