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Policy Brief / Climate

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Low-carbon Innovation and Investment in the EU ETS

Author(s): LABANDEIRA Xavier, MARCANTONINI Claudio, TEIXIDO-FIGUERAS Jordi, VERDE Stefano

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ABSTRACT

  • The empirical literature indicates that, in Phases I and II, the impact of the EU ETS on low-carbon innovation was moderate. The findings of one prominent study, which measures innovation output by patent counts, present a more clearly positive picture.
  • The empirical literature indicates that, in Phases I and II, low-carbon investments brought about by the EU ETS were typically small-scale, with short amortisation times (e.g., three to five years), producing incremental emission reductions.
  • In view of the EU’s long-term emission reduction targets, there is scope to improve the dynamic efficiency of the EU ETS by strengthening incentives for low-carbon innovation and investment. Tightening the cap and extending allowance auctioning in a predictable way are the most frequent recommendations in the literature.
  • There is a compelling economic case, related to innovation spillovers, scale and network economies, competitiveness preservation and energy security, for complementing the EU ETS with stronger R&D policies.
  • The Innovation Fund – the future EU ETS funding programme for low-carbon innovation – will build on the experiences gained through the existing NER 300 programme in several important respects.