Environmental Engineering Reference
In-Depth Information
2.1.2 The Reply
A carbon price is an appropriate instrument to internalize the negative environ-
mental externalities related to CO
2
emissions. However, there are other externalities
(i.e., market failures) in the innovation process, i.e., an innovation and a deploy-
ment externality. There is a technological externality which is related to spillover
effects enabling copying of innovations, which reduces the gains from innovative
activity for the innovator without full compensation. In other words,
rms are
unable to fully appropriate their R&D. Basic research has especially high spill-over
rates. This
does not only relate to R&D, but also to
demonstration
4
[
19
]. In addition, there is a deployment externality. This is related to
the increased deployment of a technology which results in cost reductions and
technological improvements due to learning effects and dynamic economies of scale
[
20
].
5
Although investors can partially capture these learning bene
“
innovation externality
”
ts, e.g., using
patents or their dominant position in the market [
22
], the initial investor does not
capture all of them. Thus, investments in the new technology will remain below
socially optimal levels.
6
Of course, learning is certainly a source of innovation and
cost reductions but it does not come freely. It is the result of previous investments.
7
These two externalities provide a rationale for complementing the carbon price
with additional instruments which tackle those externalities. R&D can be encour-
aged directly with R&D subsidies, tax credits and rebates. Demonstration can be
supported with funding of demonstration projects. Finally, deployment of low-
carbon technologies can be promoted directly with a wide array of instruments,
including feed-in tariffs (FITs), tradable green certi
cates (TGCs), tendering and
investment subsidies, among others (see Sect.
2.4
).
The relevance of the innovation externality is very high in the
rst stages (i.e.,
research and development), and decreases as we move downstream in the innovation
process, i.e., the diffusion stage where technologies are already mature (Fig.
1
). In
contrast, the environmental externality is relatively more important in the diffusion
stage. Thus, it seems clear that in the initial and
nal stages, instruments should
predominantly tackle the innovation and environmental externalities, respectively.
The deployment externality usually plays a major role in the intermediate stages of
4
The size and complexity of demonstrating these technologies, which often includes complex
planning and infrastructural support, make it difcult for the private sector to independently
nance demonstration [
18
].
5
Since the 1970s, the costs of energy production from all technologies have fallen systematically
through innovation and economies of scale in manufacture and use (apart from nuclear power).
Technologies such as solar energy and offshore wind all show much scope for further innovation
and cost-reduction [
18
,
21
].
6
Different types of learning effects have been considered in the literature, including learning-by-
doing, learning by using and learning by interacting.
7
In addition, there are other failures (some of them sector-speci
c) that might contribute to under-
investment in innovation in market-only environments. These include constrained access to credit
for small innovative
rms, informational problems and costs and agency issues (split incentives)
[
6
,
13
]. They can vary across different technologies and sectors [
7
].
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