Emissions trading and technological change

Emissions trading programmes have grown in number and scope over the last forty years, and in the last decade they have become a centrepiece of global climate change policy. Emissions trading can in principle offer policy makers a flexible mechanism to reduce harmful emissions - polluters can choose their own emissions abatement strategy, and the trading mechanism can reduce overall abatement cost by flexibly redistributing emissions permits to those polluters that find abatement costliest. In the context of climate policy, though, it is the potential to stimulate innovation and technological change that is most alluring. Without transforming production, the quantity of emissions abatement will be insufficient; without technological change, the cost will be prohibitive. Emissions trading programmes are clearly not the only policy that affect technological change, but the extent to which these programmes encourage low-carbon technological change is perhaps still the most important criterion on which to judge their success or failure. Advances in monitoring, greater data availability, and improvements in statistical and computational techniques have only recently made it possible to systematically study the impacts of emissions trading on a large scale. In recent years, researchers have studied the impact of emissions trading programmes on company profitability, on employment, and on capital investment. This thesis aims to advance this research programme by contributing a systematic analysis of how emissions trading affects technological change. This thesis comprises four essays. The first essay examines past emissions trading programmes and the extent to which these experiences provide guidance on the ability of emissions trading programmes to affect low-carbon technological change in the future. The second essay investigates the degree to which economic theory can help constrain the range of expected impacts in a world of at east moderate complexity. The third and fourth essays present the first comprehensive empirical assessment of how the world's largest emissions trading programme, the EU Emissions Trading Scheme, has affected technological change, measured in terms of carbon dioxide intensity output, research and development, and patenting

Adopt or innovate: understanding technological responses to cap-and-trade

One important motivation for creating cap-and-trade programs for carbon emissions is the expectation that they will stimulate much-needed low-carbon innovation. I construct a new panel of British firms to investigate this hypothesis, finding that the European carbon market has encouraged greater low-carbon patenting and R&D spending among regulated firms without necessarily driving short-term reductions in carbon intensity of output. This stands in contrast to past cap-and-trade programs, which have primarily spurred adoption of existing pollution control technologies, with little effect on innovation. I discuss how to reconcile these contrasting findings and implications for the future of carbon markets

Environmental Policy and Directed Technological Change: Evidence from the European Carbon Market

This paper investigates the impact of the EU Emissions Trading Scheme (EU ETS) on technological change. We exploit installations-level inclusion criteria to estimate the impact of the EU ETS on firms patenting. We find that the EU ETS has increased low-carbon innovation among regulated firms by as much as 10%, while not crowding out patenting for other technologies. We also find evidence that the EU ETS has not impacted patenting beyond the set of regulated companies. These results imply that the EU ETS accounts for nearly a 1% increase in European lowcarbon patenting compared to a counterfactual scenario

Environmental policy and directed technological change: evidence from the European carbon market

This paper investigates the impact of the European Union Emissions Trading System (EU ETS) on technological change, exploiting installations-level inclusion criteria to estimate the System's causal impact on firms' patenting. We find that the EU ETS has increased low-carbon innovation among regulated firms by as much as 10%, while not crowding out patenting for other technologies. We also find evidence that the EU ETS has not impacted patenting beyond the set of regulated companies. These results imply that the EU ETS accounts for nearly a 1% increase in European low-carbon patenting compared to a counterfactual scenario

On the physics of three integrated assessment models

Differing physical assumptions are embedded in an important class of integrated assessment models. Reverse-engineering a common description of their underlying physics facilitates inter-comparisons that separate economic and physical uncertainties. Integrated assessment models (IAMs) are the main tools for combining physical and economic analyses to develop and assess climate change policy. Policy makers have relied heavily on three IAMs in particular—DICE, FUND, and PAGE—when trying to balance the benefits and costs of climate action. Unpacking the physics of these IAMs accomplishes four things. Firstly, it reveals how the physics of these IAMs differ, and the extent to which those differences give rise to different visions of the human and economic costs of climate change. Secondly, it makes these IAMs more accessible to the scientific community and thereby invites further physical expertise into the IAM community so that economic assessments of climate change can better reflect the latest physical understanding of the climate system. Thirdly, it increases the visibility of the link between the physical sciences and the outcomes of policy assessments so that the scientific community can focus more sharply on those unresolved questions that loom largest in policy assessments. And finally, in making explicit the link between these IAMs and the underlying physical models, one gains the ability to translate between IAMs using a common physical language. This translation-key will allow multi-model policy assessments to run all three models with physically comparable baseline scenarios, enabling the economic sources of uncertainty to be isolated and facilitating a more informed debate about the most appropriate mitigation pathway

New priorities for climate science and climate economics in the 2020s

Climate science and climate economics are critical sources of expertise in our pursuit of the Sustainable Development Goals. Effective use of this expertise requires a strengthening of its epistemic foundations and a renewed focus on more practical policy problems

Policing carbon markets

Carbon markets have emerged in recent decades as one of the most important tools for curbing industrial greenhouse gas emissions, but they present a number of novel enforcement challenges as compared to more conventional pollution regulations—new regulators with narrow authority, lack of legal precedent, and more. To shed light on the practical issues involved in policing carbon markets, we present the first comprehensive analysis of the EU Emissions Trading System, a single program that was policed by 31 different national regulators. We find generally high rates of compliance coupled with low rates of enforcement, a pattern that is known in the literature as ‘Harrington’s paradox.’ Variation in the probability and severity of fines explain just one tenth of the variation in compliance rates. Meanwhile, other enforcement strategies that have been pointed to as resolutions to Harrington’s paradox in other applications, such as ‘naming and shaming,’ appear to have had little discernible effect

Do carbon offsets offset carbon?

We develop and implement a new method for identifying wasted subsidies, and use it to provide systematic evidence on the misallocation of carbon offsets in the Clean Development Mechanism - the world's largest carbon offset program. Using newly constructed data on the locations and characteristics of 1,350 wind farms in India - a context where it was believed, ex-ante, that the Clean Development Mechanism could significantly increase development above baseline projections - we estimate that at least 52% of approved carbon offsets were allocated to projects that would very likely have been built anyway. In addition to wasting scarce resources, we estimate that the sale of these offsets to regulated polluters has substantially increased global carbon dioxide emissions

The elusive quest for additionality

Development finance institutions (DFIs) annually invest $90 billion to support under-financed projects across the world. Although these government-backed institutions are often asked to show that their investments are “additional” to what private investors would have financed, it is rarely clear what evidence is needed to answer this request. This paper demonstrates, through a series of simulations, that the nature of DFIs’ operations creates systematic biases in how a range of estimators assess additionality. Recognising that rigorous quantitative evidence of additionality may continue to elude us, we discuss the value of qualitative evidence, and propose a probabilistic approach to evaluating additionality