Does cap-and-trade produce technological innovation?

Cap-and-trade is dead, but some folks never tire of kicking the corpse. Corpse kickers received a boost last week from a paper published in the journal Proceedings of the National Academy of Sciences, which purported to show that cap-and-trade programs “do not provide sufficient incentives for energy technology innovation.”

This strikes me as a classic example of a press release overhyping and oversimplifying a paper to get attention. Consequently, I bet a lot of people are going to misread it, and discussion of cap-and-trade, to the extent it still exists, will get even more caricatured and divorced from reality. Too bad — the paper is actually pretty interesting. It’s worth teasing out what it does and doesn’t show.

Scientist Margaret Taylor of the Lawrence Berkeley National Laboratory analyzed two existing cap-and-trade programs: the national U.S. market for sulfur dioxide (SO2) and the nitrogen-oxides (NOx) trading program in Northeast and mid-Atlantic states. (Right off the bat, we need to be careful. The SO2 and NOx programs can be instructive, but a robust carbon trading system would be very, very different, incomparably larger and more complex.)

In particular, Taylor looked at the relationship between those two cap-and-trade programs and the rate of technological innovation. Here’s the story she tells:

When the programs were being developed, everyone overestimated how expensive they would be (which always happens). Two things followed from that. First, politicians got scared and set emission-reduction targets too low. Second, the private sector overestimated how much technology innovation would be demanded and thus over-invested in R&D.

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Categories: Energy, Resources