Cap and trade programs to reduce emissions do not
inherently provide incentives to induce the private sector to develop
innovative technologies to address climate change, according to a new study in
the journal Proceedings of the National Academy of Sciences.
In fact, said author Margaret Taylor, a researcher
at Lawrence Berkeley National Laboratory (Berkeley Lab) who conducted the study
while an assistant professor at the University of California, Berkeley’s
Goldman School of Public Policy, the success of some cap and trade programs in
achieving predetermined pollution reduction targets at low cost seems to have
reduced incentives for research and development that could help develop more
appropriate pollution control targets. Taylor
is a scientist in the Environmental Energy Technologies Division of Berkeley
Lab.
“Policymakers rarely see with perfect foresight
what the appropriate emissions targets are to protect the public health and
environment—the history is that these targets usually need to get stricter,”
said Taylor. “Yet policymakers also seldom set targets they don’t have evidence that
industry can meet. This is where R&D that can lead to the development of
innovative technologies over the longer term is essential.”
In the study, Taylor
explored the relationship between innovation and cap and trade programs (CTPs).
She used empirical data from the world’s two most successful CTPs, the U.S. national
market for sulfur dioxide control and the northeast and mid-Atlantic states’
market for nitrogen oxide control. (Respectively, Title IV of the 1990 Clean
Air Act and the Ozone Transport Commission/NOx Budget Program.)
Taylor’s
research shows that before trading began for these CTPs, analysts overestimated
how difficult it would be for emissions sources to achieve targets, in a
pattern frequently observed in environmental health, safety, and energy-efficiency
regulation, including all of the world’s CTPs. This was seen in overestimates
of the value of allowances, which are permits to release a certain volume of
emissions under a CTP. If an entity can reduce emissions cheaply, they can
either sell these allowances for whatever price they can get on the market or
they can bank these allowances to meet later emissions restrictions.
The cap-and-trade programs Taylor studied exhibited lower-than-expected
allowance prices, in part because program participants adopted an unexpected
range of approaches for reducing emissions sources in the lead-up to trading. A
large bank of allowances grew in response, particularly in the sulfur dioxide
program, signaling that allowance prices would remain relaxed for many years.
But this low-price message did not cause the policy
targets in the CTPs to change, despite evidence that it would not only be
cheaper than expected to meet these targets, but it would also be more
important to public health to tighten the targets, based on scientific
advances. The lower-than-expected price signal did cause emissions sources to
reassess their clean technology investments, however, and led to significant
cancellations, Taylor
reported.
Meanwhile, the low price also signaled to
innovators working to develop clean technologies—which are often distinct from
the emissions sources that hold allowances—that potential returns to their
research and development programs, which generally have uncertain and
longer-term payoffs, would be lower than expected.
This effect also helps explain the study’s finding
that patenting activity, the dominant indicator of commercially-oriented
research and development, peaked before these CTPs were passed and then dropped
once allowance markets began operating, reaching low levels not seen since
national sulfur dioxide and nitrogen oxide regulation began in 1970.
“There are usually relatively cheap and easy things
to do at the start of any new environmental policy program,” said Taylor, who
specializes in policy analysis, environmental and energy policy, and
innovation. “But if doing these things has the tradeoff of dampening the
incentives for longer-term innovation, there can be a real problem,
particularly when dramatic levels of technological change are needed, such as
in the case of stabilizing the global climate.”
