Environmental Policy and Directed Technological Change: Evidence from the European carbon market (original) (raw)

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. JEL: O3, Q55, Q58, C14 Greenhouse Gas Initiative (RGGI), and California's cap-and-trade program are all examples of this trend. Australia, New Zealand, and the Canadian province of Quebec have all recently created their own cap-and-trade programs to regulate greenhouse gas emissions, and China, Japan, South Korea, and Brazil are individually making moves toward launching their own. Global carbon markets are today worth over 175billionayear(KossoyandGuigon,2012),andwithsomanynewinitiativesintheworks,thisnumberwilllikelygrowmuchlargerinyearstocome.Atpresent,mostofthe175 billion a year (Kossoy and Guigon, 2012), and with so many new initiatives in the works, this number will likely grow much larger in years to come. At present, most of the 175billionayear(KossoyandGuigon,2012),andwithsomanynewinitiativesintheworks,thisnumberwilllikelygrowmuchlargerinyearstocome.Atpresent,mostofthe175 billion a year is accounted for by the European Union Emissions Trading Scheme (EU ETS). It launched in 2005, allocating tradable emissions permits to over 12'000 power stations and industrial plants in 24 countries, accounting for over 40% of the EU's total greenhouse gas emissions. 1 It is today the world's largest cap-and-trade program. Like all of the new emissions trading initiatives around the globe, the primary aim of the EU ETS is to reduce carbon emissions, but to do so through innovation rather than output reduction. When regulated firms expect to face a higher price on emissions relative to other costs of production, this provides them with an incentive to make operational changes and investments that reduce the emissions intensity of their output. The "induced innovation" hypothesis, dating back to Sir John Hicks (1932) and restated in the context of environmental policy by Porter (1991) and Acemoglu et al. (2012), suggests that part of this new investment will be directed toward developing and commercializing new emissions-reducing technologies. According to this theory, the EU ETS can be expected to spur development of new low-carbon technologies.