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Does carbon pricing spur climate innovation? A panel study, 1986–2019

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Abstract

Across the world, governments have enacted policies to discourage fossil fuel use. Scholars have explored whether carbon pricing policies, such as carbon taxes and cap-and-trade, reduce emissions. In the present study, we examine whether carbon pricing spurs climate innovation. In doing so, we test the Porter−Linde hypothesis, which suggests that flexible and non-technology-forcing regulations spur innovation. Our dynamic panel data analysis covering 38 countries in the Organisation for Economic Cooperation and Development (OECD) over 34 years finds that the adoption of carbon pricing policies is associated with an increase in patent applications for climate mitigation technologies of 3.1 per million population in the year of enactment, and 5.2 per million population in the long term. This finding holds controlling for other policies that can influence climate innovation such as feed-in tariffs and public investment in low-carbon research and development (R&D). Further, we find that the trade leakages do not undermine the association between carbon pricing and climate innovation.

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The 2015 Paris Agreement adopted the goal of limiting the rise in global mean temperature to 1.5–2 °C above pre-industrial levels. Carbon pricing can play a key role in meeting this objective. A cap-and-permit system, or alternatively a carbon tax indexed to a fixed emission-reduction trajectory, not only can spur cost-effective mitigation and cost-reducing innovation, but also, crucially, can ensure that emissions are held to the target level. The carbon prices needed to meet this constraint are likely to be considerably higher, however, than existing prices and conventional measures of the social cost of carbon. This poses issues of distributional equity and political sustainability that can be addressed by universal dividends funded by carbon revenues.
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Carbon pricing is an essential instrument to address climate change. However international differences in carbon control policies may cause not only carbon leakage but also competitiveness disadvantages. In this context, border carbon adjustments are a promising tool for discouraging these problems. But designing a real-world border carbon adjustment instrument implies to consider significant issues: technical feasibility, data availability, the risk of retaliation from developing countries, and its compatibility within the World Trade Organization legal framework. There are still no conclusive answers about a proper design. This paper is an attempt to address the above-mentioned challenges proposing a carbon border tax (CBT) based on avoided emissions. Such a CBT is applied at a product level and not at a sector level, and all international prices are deflated to guarantee that import ‘like’ goods received a treatment similar to ‘like’ domestic products. Using the WIOD, we simulate a CBT based on avoided emissions applied by the European Union, and we compare the results with a CBT based on embodied emissions.
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The “difference” and “system” generalized method of moments (GMM) estimators for dynamic panel models are growing steadily in popularity. The estimators are designed for panels with short time dimensions (T), and by default they generate instruments sets whose number grows quadratically in T. The dangers associated with having many instruments relative to observations are documented in the applied literature. The instruments can overfit endogenous variables, failing to expunge their endogenous components and biasing coefficient estimates. Meanwhile they can vitiate the Hansen J test for joint validity of those instruments, as well as the difference-in-Sargan/Hansen test for subsets of instruments. The weakness of these specification tests is a particular concern for system GMM, whose distinctive instruments are only valid under a non-trivial assumption. Judging by current practice, many researchers do not fully appreciate that popular implementations of these estimators can by default generate results that simultaneously are invalid yet appear valid. The potential for type I errors—false positives—is therefore substantial, especially after amplification by publication bias. This paper explains the risks and illustrates them with reference to two early applications of the estimators to economic growth, Forbes (2000) on income inequality and Levine, Loayza, and Beck (LLB, 2000) on financial sector development. Endogenous causation proves hard to rule out in both papers. Going forward, for results from these GMM estimators to be credible, researchers must report the instrument count and aggressively test estimates and specification test results for robustness to reductions in that count.
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Significance The most important single economic concept in the economics of climate change is the social cost of carbon (SCC). At present, regulations with more than $1 trillion of benefits have been written for the United States that use the SCC in their economic analysis. The DICE model (Dynamic Integrated model of Climate and the Economy) is one of three integrated assessment models used to estimate the SCC in the United States. The present study presents updated estimates based on a revised DICE model (DICE-2016R). The study estimates that the SCC is $31 per ton of CO 2 in 2010 US$ for the current period (2015). This study will be an important step in developing the next generation of estimates of the SCC in the United States and other countries.
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Emission data from EDGAR (Emissions Database for Global Atmospheric Research), 7 rather than economic data, are used to estimate the effect of policies and of the global exports of 8 policy-regulated goods, such as vehicles, on global emissions. The results clearly show that the 9 adoption of emission standards for the road transport sector in the two main global markets 10 (Europe and North America) has led to the global proliferation of emission-regulated vehicles 11 through exports, regardless the domestic regulation in the country of destination. It is in fact 12 more economically convenient for vehicle manufacturers to produce and sell a standard product 13 to the widest possible market and in the greatest possible amounts. The EU effect (European 14 Union effect) is introduced as a global counterpart to the California effect. The former is a direct 15 consequence of the penetration of the EURO standards in the global markets by European and 16 Japanese manufacturers, which effectively export the standard worldwide. We analyze the effect 17 on PM 2.5 emissions by comparing a scenario of non-EURO standards against the current 18 estimates provided by EDGAR. We find that PM 2.5 emissions were reduced by more than 60% 19 since the 1990s worldwide. Similar investigations on other pollutants confirm the hypothesis that 20 the combined effect of technological regulations and their diffusion through global markets can 21 also produce a positive effect on the global environment. While we acknowledge the positive 22 feedback, we also demonstrate that current efforts and standards will be totally insufficient 23 should the passenger car fleets in emerging markets reach Western per capita figures. If 24 emerging countries reach the per capita vehicle number of the USA and Europe under current 25 technological conditions, then the world will suffer pre-1990 emission levels. 26
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The European Union (EU) is an important destination for developing country exports. Has the EU's commitment to the Kyoto Protocol induced developing countries to reduce their carbon dioxide (CO2) emissions? Our analyses of 136 developing countries from 1981 through 2007 suggests that: developing countries' export dependence on the EU is associated with CO2 emission reductions post-Kyoto in relation to the pre-Kyoto time period; this also holds for SO2, which, while not covered under Kyoto, is linked with CO2 emission levels; this does not hold for PM10, a pollutant which is not covered under Kyoto and is not directly associated with CO2 emissions related to industrial activities; developing countries' export dependence on non-EU developed countries and on the rest of the world is not associated with significant reductions in emissions between pre- and post-Kyoto for these pollutants. In sum, even in the absence of binding regulatory mandates, the EU appears to exert market leverage to project its regulatory preferences abroad.
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This article reviews the recent literature on ex post evaluation of the impacts of the European Union (EU) Emissions Trading Scheme (ETS) on regulated firms in the industrial and power sectors. We summarize the findings from original research papers concerning three broadly defined impacts: carbon dioxide emissions, economic performance and competitiveness, and innovation. We conclude by highlighting gaps in the current literature and suggesting priorities for future research on this landmark policy. (JEL: Q52, Q54, Q58)
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Carbon taxes efficiently reduce greenhouse gas emissions, but are criticized as regressive. This paper links dynamic overlapping-generation and micro-simulation models of the United States to estimate the initial incidence of carbon taxes. We find that while carbon taxes are regressive, incidence depends much more on how carbon tax revenue is used. Recycling revenues to cut capital taxes is efficient but exacerbates regressivity. Lump sum rebates are less efficient, but much more progressive, benefitting the three lower income quintiles even when ignoring environmental benefits. A labor tax swap represents an intermediate option, as it is more progressive than a capital tax swap and more efficient than a rebate.
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Germany has been the front-runner in the introduction of feed-in tariffs. Under the Renewable Energy Sources Act, the so-called Erneuerbare-Energien-Gesetz (EEG), a massive expansion of electricity from renewable energy sources in Germany occurred over the last decade. The increase in non-competitive renewable power generation though went hand in hand with a substantial rise in electricity prices - with consumers paying for the renewable energy subsidies. The high cost burden has provoked an intense public debate on the benefits of renewable energy promotion. In this paper, we assess one popular justification for the feed-in tariff scheme, i.e., the demand-side effect of the EEG induced innovation. The aggregate results do lend support to the proposition that the feed-in tariff scheme under the EEG spur innovation. However, the technology-specific findings cast doubts on the aggregate effect as only yearly additions to subsidies earmarked for biomass technologies contribute significantly to renewable innovation.
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Governments enact environmental regulations to compel firms to internalize pollution externalities. Critics contend that regulations encourage technological lock-ins and stifle innovation. Challenging this view, the Porter-Linde hypothesis suggests that appropriately designed regulations can spur innovation because (1) pollution reflects resource waste; (2) regulations focus firms’ attention on waste; and (3) with regulation-induced focus, firms are incentivized to innovate to reduce waste. This article explores the regulation–innovation linkage in the context of voluntary regulations. The authors focus on ISO 14001, the most widely adopted voluntary environmental program in the world. Examining a panel of 79 countries for the period 1996–2009, they find that country-level ISO 14001 participation is a significant predictor of a country's environmental patent applications, a standard proxy for innovation activity. The policy implication is that public managers should consider voluntary regulation's second-order effects on innovation, beyond their first-order effects on pollution and regulatory compliance.
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This article investigates the causal relationship between public policies and exports of renewable energy technologies using panel data from 18 countries for the period 1991–2007. A number of panel unit root and cointegration tests are applied. Time series data on public policies and exports are integrated and cointegrated. The dynamic OLS results indicate that in the long run, a 1% increase in government R&D expenditures (RAD) increases exports (EX) by 0.819%. EX and RAD variables respond to deviations from the long-run equilibrium in the previous period. Additionally, the Blundell–Bond system generalized methods of moments (GMM) is employed to conduct a panel causality test in a vector error-correction mechanism (VECM) setting. Evidence of a bidirectional and short-run, and strong causal relationship between EX and the contribution of renewable energy to the total energy supply (CRES) is uncovered. CRES has a negative effect on EX, whereas EX has a positive effect on CRES. We suggest some policy implications based on the results of this study.
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Environmental economics has traditionally fallen in the domain of microeconomics, but recently approaches from macroeconomics have been applied to studying environmental policy. We focus on two macroeconomic tools and their application to environmental economics. First, real business cycle models can incorporate pollution and pollution policy and be used to answer several questions. How can environmental policy adjust to business cycles? How do different types of policies fare in a context with business cycles? Second, endogenous technological growth is an important component of environmental policy. Several studies ask how policy can be designed to both tackle emissions directly and influence the adoption of clean technologies. We focus on these two aspects of environmental macroeconomics but emphasize that there are many other potential applications.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
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Can directed technical change be used to combat climate change? We construct new firm-level panel data on auto industry innovation distinguishing between "dirty" (internal combustion engine) and "clean" (e.g. electric and hybrid) patents across 80 countries over several decades. We show that firms tend to innovate relatively more in clean technologies when they face higher tax-inclusive fuel prices. Furthermore, there is path dependence in the type of innovation both from aggregate spillovers and from the firm's own innovation history. Using our model we simulate the increases in carbon taxes needed to allow clean to overtake dirty technologies.
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Using data from electric utilities, this study shows that spending on well designed regulations has a positive productivity impact but that spending on less well-designed regulations has a negative effect. Better-designed regulations are flexible and grant firms latitude on how to meet goals, allow them time to deploy new means to meet goals, and set ambitious goals that stretch them beyond current practices.