Design, Trading, and Innovation

This chapter makes two theoretical claims and two empirical claims. The first theoretical claim is that emissions trading does a poorer job, in theory, of encouraging expensive innovation than traditional regulation. It also argues that expensive innovation has special value that justifies the expense in some important cases. The second theoretical claim is that emissions trading may perform worse than traditional regulation in encouraging inexpensive innovation as well, at least in theory. The first empirical claim is that both emissions trading and traditional regulation have sometimes encouraged innovation and sometimes failed to do so. The second claim is that there is no convincing empirical evidence that trading fosters innovation better than a comparably designed traditional regulation.