Abstract
Innovation clusters combining public and private effort to develop breakthrough technologies promise greater technological advances to slow down climate change. We use a multi-country model with an emission trading system to examine whether and how international climate policy can incentivize countries to create such innovation clusters. We find that a minimal carbon price is needed to attract applied research firms, but countries may nevertheless fail to invest in complementary research infrastructure. We construct a mechanism that leads to innovation clusters when emissions targets are set before uncertainty surrounding technological developments is resolved. It is a combination of low permit endowments for the country with the lowest costs to build the needed infrastructure, compensation for this country by profits from permit trade, and maximal possible permit endowments for the remaining countries. We outline how the EU-ETS can be further refined according to this mechanism.
Highlights
Motivation Most suggestions how to slow down climate change concern emissions reduction or technological advances
The detection of a new technology is only possible if an innovation cluster is in place
If an applied research firm becomes active and invests the fixed amount x (x > 0), an innovation cluster is in place and the applied research firm can detect the new technology with probability π (0 < π < 1)
Summary
Motivation Most suggestions how to slow down climate change concern emissions reduction or technological advances. Compared to the global social optimum, countries may lack incentives to invest in research infrastructure and make one innovation cluster possible, even if the permit price target in the ETS is high. To overcome both potential inefficiencies within an ETS, we introduce a mechanism—called “Innovationcluster-generation” procedure—that works as follows: According to the mechanism, the country with the lowest costs for research infrastructure is only endowed with few permits It is compensated with profits generated by the trading agency. This country has high incentives to invest in the research infrastructure and to attract applied research firms, such that an innovation cluster forms This gives the chance to lower the abatement costs and the costs of buying large amounts of permits.
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