Innovation clusters against climate change

(10.9.2021) How permit markets can be used to spur technological breakthroughs.

Without technological breakthroughs, e.g. in carbon capture and storage technologies or energy storage, keeping global warming below the 1.5-degree target may be impossible to achieve. For greater technological advances, combining private and public effort is often required, as in the case of wind energy or the development for Carbon Capture and Storage (CCS), for example. Combining public and private effort to make greater technological advances works particularly well in innovation clusters, with prominent examples such as Silicon Valley and the Boston Area. In innovation clusters, an entire R&D infrastructure involving publicly financed institutions, like universities and research labs, typically provides ideas, methods, prototypes, skilled labor and laboratories, which private applied research firms can use to commercialize blueprints.

In the article “Permit markets, carbon prices and the creation of innovation clusters” published in Resource and Energy Economics, Marie-Catherine Riekhof from CeOS, together with Hans Gersbach from ETH Zürich, examine how such an innovation cluster for green technologies can be incentivized by using the means of existing emissions trading systems.

The major challenge in inducing innovation clusters for green technologies is the global public good property of slowing down climate change and the fact that costs of creating innovation clusters and technology development are borne at the local level. The authors examine the impact of permit allocation within an emissions trading system (ETS) on the incentives of a country to create an innovation cluster. The main focus is not on additional research subsidies, as they are likely to create political economy problems of their own and are probably infeasible in times of high public debt. Instead, the authors suggest a mechanism that internalizes the positive externalities a country generates within the ETS, when it invests in R&D infrastructure for green technologies. The mechanism has to balance the desire to make it as attractive as possible for a country to set-up the R&D infrastructure and the incentives for other countries to participate in the ETS. How the EU-ETS can be refined with this mechanism is also discussed.

https://www.sciencedirect.com/science/article/pii/S0928765521000142