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

Past cap-and-trade programmes have tended to encourage polluters to adopt existing abatement technologies, but have generally had little effect on innovation. This paper presents new evidence that the EU Emissions Trading System (EU ETS) may have bucked this trend and encouraged innovation rather than adoption.

Key points for decision-makers

  • Achieving long-term decarbonisation will require new abatement technologies. Policymakers have expressed hope that carbon markets will spur low-carbon innovation to help achieve this ambition.
  • Past cap-and-trade systems (e.g. to regulate sulphur dioxide and nitrogen oxides) achieved emissions reductions mainly by encouraging firms to adopt ‘off the shelf’ technologies without significant development of new technologies.
  • New evidence from British companies indicates that the EU ETS has encouraged low-carbon patenting and R&D spending rather than adoption of existing abatement technologies.
  • Past cap-and-trade programmes were implemented against a backdrop of relatively mature pollution control technologies. In these circumstances new technologies have less chance of creating major savings for firms. Therefore adopting existing technologies to make savings in compliance costs could be more attractive to firms.
  • The same technological pre-conditions did not exist in the EU ETS, or in carbon markets more generally. The greater distance between current technologies and those needed to achieve long-term decarbonisation makes it less attractive for firms to adopt ‘off the shelf’ technologies that may become obsolete soon. Instead firms may invest in and develop new low-carbon technologies that will reduce abatement costs more dramatically.

ISSN 2515-5717 (Online) – Grantham Research Institute Working Paper series

ISSN 2515-5709 (Online) – CCCEP Working Paper series