Abstract
This paper asks whether the European Union's (EU) Emissions Trading Scheme has encouraged investment in renewable energy and energy efficiency projects in developing countries. So far, it has produced very little investment in either in spite of the EU's decision to allow credits for projects undertaken in developing countries through the Kyoto Protocol's Clean Development Mechanism. This may reflect the relatively high cost of renewable energy and the awkwardness of assessing the additionality of energy efficiency projects. While the literature generally associates emissions trading with innovation, emissions trading does not encourage innovation with high short term costs, even when such innovation has strong positive spillover effects.
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