Incentives for advanced abatement technology under national and international permit trading
We analyse the incentives for polluting firms to diffuse and adopt advanced abatement technology in two different frameworks, a national and an international one. In the first framework, the national government establishes a national permit market. In the second one, governments negotiate an environmental agreement that establishes an international permit market. In both scenarios we consider three different variants of allocation procedures (auctioning, benchmarking and grandfathering). We show that in the national as well as in the international scenario the incentives to diffuse and adopt the technology depend on the allocation rule. Whereas in the national scenario diffusion (if it occurs) always leads to socially optimal outcomes, diffusion may increase global environmental damages and reduce global welfare in the international scenario. This paper extends the seminal analysis by Milliman/Prince (1989).
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