Asymmetric Learning by Doing and Dynamically Efficient Policy: Implications for Domestic and International Emissions Permit Trading of Allocating Permits Usefully

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Learning by doing leads to cost reductions as suppliers move down the ‘experience curve’. This results in a beneficial supply side inter-temporal externality that, for dynamic efficiency, requires a higher incentive for abatement innovations than the penalty on emissions. This effect can be achieved by a dedicated emissions tax or by a proportionate abatement obligation or by allocating permits usefully. The latter arrangement is compatible with the effective cap on emissions that is secured by an emissions trading scheme. Each of the three possibilities results in a reduced loss of international competitivity in policy-committed regions, in less ‘leakage’, and in more technology transfer. Implications for trading in emissions permits and in project-related credits are discussed.