Does the EU-ETS Drive Technological Innovation?

For instructors who include a module on the European Union’s Emissions Trading System (EU-ETS), and/or critiques of cap and trade mechanisms, the Fondazione Eni Enrico Mattei, an Italian research institute, published an excellent report in 2012 assessing the effectiveness of the EU-ETS in driving low carbon technology options. The report summarizes a study conducted by the institute in which it used a constructed data set linking 8.5 million European companies with their patenting history and regulatory status to test the thesis that the EU-ETS has helped to drive development of low-carbon technologies.  

Among the take-aways from the report:

  1. The most important determinant of the long-run cost of emissions abatement may be the potential for environmental policies to drive technological innovation;
  2. The EU-ETS to date “appears to have had virtually no impact” on low-carbon technological change;
  3. The primary impact of the EU-ETS to date appears to be driving some fuel-switching. However, fuel-switching only has the potential to reduce greenhouse gas emission by 300 tons annually, which is only 10% of the cuts that must be effectuated in the EU to meet its goal of reducing emissions by 80% by 2050 from 1990 levels;
  4. As currently configured, “demand-pull policies” such as the EU-ETS may not be sufficient to drive low-carbon technological change. As is the case with pollution, which is driven by market failures, “under-innovation” is driven by the same phenomenon.

This reading could stimulate some good discussion on both the future of the EU-ETS and cap-and-trade policies more generally. Among potentially pertinent discussion questions:

  1. This study was limited to the first phase of the EU-ETS; is there reason to believe that it contributed more to technological innovation during the second phase  of implementation, maybe in the upcoming third phase?;
  2. What additional measures should the EU take either within or outside the framework of the EU-ETS to drive technological innovation?;
  3. What has been the experience to date of other cap and trade systems (e.g. RGGI) in driving technological change?


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