Theory and Impact
Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Soocheol Lee, Kazuhiro Ueta, Janet E. Milne and Hope Ashiabor
Chapter 9: Incentivizing technologic change in emissions trading systems: the case of excess supply
Economic activity is associated with greenhouse gas emissions and therefore affects climate change. One can address climate change by targeting energy production (e.g. renewable energy or shale gas), by reducing the emission intensity of the industry (e.g. through emissions trading or carbon taxes) and by inducing behavioural changes of consumers (e.g. building regulation, smart energy meters). While addressing all factors contributing to climate change makes intuitive sense, the policy instruments mutually affect each other. A high CO2 allowance price for example makes investments in renewable energy sources more attractive and, incentivizes home owners to invest in better insulation. In addition to supporting other climate change policy instruments, a high emission allowances price incentivizes companies to invest in technological innovation, research and development. It is this transformation of the economy that is expected to stem from emissions trading systems and is a declared objective of the European Emissions Trading System (EU ETS). Emissions trading systems are appealing because they reduce greenhouse gas emissions at the lowest cost. Covered entities with the lowest abatement cost invest in abatement technology. These ‘saved’ emissions can be sold to entities that have higher abatement costs. Investment in abatement technology is thus an integral part of emissions trading. A mismatch between supply and demand in a cap-and-trade emissions trading system is not a problem for reaching the determined environmental target – its environmental effectiveness is not harmed. It is only a problem if one strives to incentivize green investments.
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