Cap-and-Trade Programs and Innovation for Climate Safety

Cap-and-Trade Programs and Innovation for Climate Safety Margaret Taylor1 Richard and Rhoda Goldman School of Public Policy University of California, Berkeley 2607 Hearst Avenue Berkeley, CA USA 94720-7320 tel: 011-510-642-1048 fax: 011-510-643-9657 Abstract [Needs revision] Analysts generally agree that considerable technological innovation will be necessary to reduce greenhouse gas (GHG) emissions to “safe” levels while minimizing economic impacts Market failures related to both environmental pollution and innovation reduce the likelihood that the private sector will provide that innovation without public intervention Meanwhile, cap-and-trade programs (CTPs) for GHG reductions are rapidly becoming the world’s dominant climate policy instrument This paper assesses the innovation effects of the three most prominent CTPs in existence that have lengthyenough operations for evaluation and strong similarities to climate CTPs It shows that in each CTP, lower-than-expected pollution prices emerged that led to smaller-thanexpected markets for a wide range of emissions reduction technologies Further, in two of the three CTPs, significant cancellations of technology orders already in process compounded the reduced market expectations for these technologies during CTP operations In addition, the paper shows that dramatic declines occurred in patenting activity – the most widely used indicator of the levels of inventive effort involved in developing technologies for later sale – in all of the identified technologies when CTPs were operating, as compared to periods of time that were dominated by more traditional environmental regulation The paper concludes by raising concerns about whether CTPs will be able to induce the levels of pre-commercial inventive activity necessary to achieve climate safety without careful policy design and complementary policy efforts Classification Codes and Keywords Keywords: Environmental Policy, Innovation, Emissions Trading, Climate Change JEL codes: Q54, Q55, Q58 Introduction Analysts generally agree that the process of reducing greenhouse gas (GHG) emissions to “safe” levels, while minimizing economic impacts, will require considerable technological innovation.1 Large portions of global GHGs are emitted by key sectors of the economy; for example, electric power (24% of global emissions), transportation (14%), industry (14%), and agriculture (14%), when combined, contribute 66% of global emissions [1] In comparison, “safe” GHG levels have been set at 50-80% below 1990 total emissions by 2050 in recent initiatives by the European Union, Canada, Japan, and This paper will distinguish between innovation as a process and its component activities, defined here to include the invention and commercialization of new products and processes, as well as the initial adoption then diffusion of new technologies throughout the economy Draft – Please not cite or distribute without author’s permission – 4/7/0 California These are very ambitious goals, both in terms of the absolute GHG levels required and the speed at which those levels need to be reached, particularly when one considers the long operating life of many major individual emissions sources, such as power plants But the specter that even these ambitious targets will be inadequate to ensure climate safety is being raised by the latest findings of an accelerating growth rate of atmospheric carbon dioxide (CO2), faster-than-predicted ice melts, and growth in China's CO2 emissions that is outpacing previous estimates [2; 3; 4] Market failures related to both environmental pollution and innovation decrease the likelihood that the private sector will provide the necessary levels of “climate-safe” innovation without public intervention.2 A critical question, therefore, is which policy approaches will best serve to foster that innovation This question is largely unanswered by empirical scholarship on environmental innovation, however, despite more than thirty years of renewable energy, energy efficiency, and environmental policy experience to draw on In the meantime, climate policy is rapidly evolving, and cap-and-trade programs (CTPs) for GHG mitigation are becoming the world’s dominant climate policy instrument, with the European Union (EU), Australia, over half of both the U.S States and Canadian Provinces, and one Mexican State either operating or developing programs.3 The primary economic case for the use of CTPs is one of static efficiency; previous CTPs have demonstrated that the instrument is capable of facilitating pollution reductions to meet relatively short-run caps at low cost in cases in which there are available technological options But there is another important factor driving the emerging dominance of CTPs in climate policy: the claim that CTPs are better than other policy instruments in providing an “incentive for innovation” [e.g 8].4 Although the literature shows the primacy of the private sector as a source of innovation [5], it also shows that the private sector under-invests in research and development (R&D) when compared to the societal returns of that R&D [e.g 6; 7] This is compounded in the case of technologies that either control or prevent pollutant emissions (“environmental technologies”) by the fact that they maintain the “public good” of a clean environment Public goods are typically characterized by weak market incentives for private investment and development Different environmental technologies reveal different combinations of public and private value For example, a pollution control device for a power plant does not create an economically valued good in and of itself unless the negative externality of pollution is somehow internalized by the power plant Similarly, the market that alternative energy technologies satisfy is shaped by a combination of the privately valued and publicly valued characteristics of the energy they provide; such privately valued characteristics include cost, availability, and other performance attributes of energy, while their publicly valued characteristic is their impact on the environment In a CTP, policy-makers set a cap on emissions and then allocate emissions “allowances” to polluting sources that are equivalent, in sum, to the cap If sources can reduce emissions cheaply, they can then try to sell excess allowances at whatever price the market will bear; in a number of CTPs, they can also “bank” these allowances for later use Such an incentive is environmentally important, as noted above, but it is also politically salient, as it raises the possibility that acting to combat climate change could also provide innovative spillovers that are economically beneficial to a jurisdiction Draft – Please not cite or distribute without author’s permission – 4/7/0 This “dynamic efficiency” claim stems from the conclusions of theoretical environmental economics studies, dating back to [9], that compare and rank such instruments as taxes, subsidies, CTPs, and traditional environmental regulation regarding their incentives for innovation The majority of these studies in the 1970s-90s supported the dominance of CTPs above other policy instruments on dynamic efficiency grounds [e.g., 9; 10; 11; 12; 13] Another set of studies, however, that is for the most part more recent than these consensus studies, have portrayed a more ambiguous situation [e.g., 14; 15; 16; 17; 18; 19; 20] As reviewed in [21], the majority of more recent authors “support the view that grandfathered permits [the dominant allowance allocation approach in CTPs] provide lower incentives [for innovation] than emission taxes and also question the notion that market-based instruments, specifically emission trading, are generally superior to direct regulation.” Significantly, [15] states that there is “no unambiguous case for preferring any of these policy instruments,” because assumptions about such things as innovation costs, appropriability concerns, the shape of environmental benefit functions, and market structure are critical to the outcomes of the models.5 In light of the political impact of the earlier literature and what seems to be a dissolving consensus about its conclusions, a brief overview is in order The dominant modeling approach analyzes the incentives of a polluting firm facing a binary choice between “its existing technology and the possibility of one single (exogenously given) new technology” [18] In light of this choice, studies typically consider firm incentives for “innovation” in pollution control under different policy scenarios, where innovation is defined to represent both the invention and the commercialization of a new product or process Most studies consider diffusion as well, either as an assumption or as a variable; as pointed out in [19], the assumption of complete diffusion of the new technology across all the firms in an industry [e.g., 10; 11] can be critical to modeling outcomes In most of the studies, innovation incentives are determined by accounting for “innovator” rewards and costs Following [11], rewards are attributed to three sources: (1) savings regarding the direct cost of abatement (examples are equipment expenses and operating costs); (2) savings related to transfer losses associated with abatement (i.e., payments made by the firm, such as emission taxes); and (3) gains related to payments made to the firm (examples include emission subsidies and patent royalties) Costs are the funds necessary to develop and implement the technology, which are termed “R&D expenditures” [18] A number of concerns have been raised about the validity of the dominant modeling approach and its assumptions, some of which are highlighted here First, both [18] and [22] point out that the representation of so-called “command and control” regulation for comparative purposes is inadequate, given the greater use in environmental law of such performance standards as limits on emissions per unit output or input Second, several studies raise issues about the potential disincentives for innovation that may arise from the dynamic nature of pollution prices in a CTP [e.g., 15; 16; 19; 20] They point out that allowance prices in a CTP are likely to drop when marginal abatement costs fall with technology adoption by a subset of early-mover polluting firms, thereby reducing the incentives for later firms to similarly adopt new technologies Third, some studies focus on the modeling treatment of polluting firms under CTPs, which typically does not [16] similarly finds that assumptions about perfect competition and information are also critical Draft – Please not cite or distribute without author’s permission – 4/7/0 differentiate between sellers of allowances (i.e., polluters who emit less pollution than their allowance allocations) and buyers of allowances (i.e., polluters who emit more pollution than their allowance allocations) The argument here is that the net incentives for innovation may be ambiguous under a CTP because, although the instrument may incentivize sellers to make more changes to their production processes than other instruments, it may also incentivize buyers to make fewer changes [17; 22].6 Fourth, a few studies and one review of the literature focus on the situation in which non-polluting third-party firms – rather than polluting firms – invent and commercialize new technologies of relevance to the environmental focus of a CTP [11; 15; 18; 23] In this situation, the rewards for innovation stem from technology sales to polluting firms rather than from abatement cost savings or revenues from allowance sales, and therefore turn the traditional accounting in models on its head.7 What does the empirical literature say about the validity of these concerns? Unfortunately, as reviews [e.g 5; 24] have pointed out, there is a dearth of empirical studies on CTPs and innovation The focus of the few studies that exist is on individual CTPs [e.g 25; 26; 27; 28; 29], rather than on bringing our collective experience operating CTPs over the last two decades to bear on understanding the innovative conditions defined by these policy instruments more generally As such, the empirical literature has not been as useful to the policy debate as the theoretical literature This paper aims to rectify this situation, to some extent The first part of the paper focuses empirically on the question of whether the major innovation sources of new products and processes related to existing CTPs are typically the polluting firms that are allotted allowances, or non-polluting third parties As predicted in [23], the evidence supports the idea that “innovations in pollution control are often (if not mostly) supplied by special outside suppliers.” This condition also appears to hold for five of the major technologies of relevance to GHG mitigation from the electric power sector.8 The second part of the paper considers the implications of the distinction between the innovators and the adopters of environmental technologies in an empirical treatment of the innovation dynamics under the three most prominent CTPs in existence that have lengthy-enough operations for evaluation and strong similarities to climate CTPs This part of the paper shows that in each CTP, lower-than-expected allowance prices emerged that led to smaller-than-expected markets for a wide range of emissions reduction technologies Further, in two of the three CTPs, significant cancellations of technology orders already in process compounded the reduced market expectations for these technologies during CTP operations In addition, dramatic declines occurred in patenting activity in all of the identified technologies when CTPs were operating, as compared to periods of time that This is because a CTP can make inexpensive compliance options (like allowance purchases) available that would not otherwise have been possible under traditional environmental policy instruments [15] suggests that there may be one additional source of revenue in a CTP for a non-polluting firm, however The authors explain that “markets might offer the innovator an opportunity to capture more of the industry gains from emissions price changes by shorting permits By contracting to sell permits in the second period at pre-innovation prices, the innovator gains from the post-innovation price fall on those promised permits.” The authors not, however, find it “credible that an innovator could short the entire permit market and capture all the industry gains.” This sector is prominently featured in most climate CTP proposals Draft – Please not cite or distribute without author’s permission – 4/7/0 were dominated by more traditional environmental regulation The paper concludes by raising concerns about whether CTPs will be able to induce the levels of pre-commercial inventive activity necessary to achieve climate safety without careful policy design and possibly complementary policy efforts Technology Innovators and Adopters This part of the paper focuses empirically on answering the question of whether the major innovation sources of new products and processes related to CTPs are typically the polluting firms that are allotted allowances, or non-polluting third parties Although this question has received very little attention in the literature, so far, the answer to it is fundamental to any understanding of the competitive dynamics of innovation under CTPs If the innovators are distinct from the polluters, there will be additional uncertainties introduced into the innovation process under a CTP system than under either emissions taxes or traditional environmental regulation Any innovator has to cope with R&D investment decisions that are long-term and have uncertain technical outcomes, of course But because the innovator rewards to non-polluting third-party firms stem from technology sales to polluting firms, it is easier for a third-party firm to predict total rewards under conditions of fixed emissions prices or fixed emissions quantities than it is under the changing allowance price situation that occurs under a CTP This is because the polluting firm “potential customers” of a new technology can choose a less predictable array of options under a CTP, including allowance purchases either alone or in combination with lower cost, less effective technologies that might not have been considered competitors to an innovator under a different policy regime If the third-party is the innovator, its investments in R&D under a CTP will necessarily be based in large part on allowance price expectations, and the portfolio of technological pathways that these innovators choose to follow will probably need to be justified internally by potential payoffs that incorporate premiums for allowance price uncertainty As mentioned above, a few theoretical economic studies and one review of the literature focus on the situation in which non-polluting third-party firms – rather than polluting firms – invent and commercialize new technologies of relevance to the environmental focus of a CTP [11; 15; 18; 23] The prevalence of this situation is not really touched upon, however, except in [23] Meanwhile, [30] empirically investigates the composition of R&D expenditures in the electric utility industry, which has been a major target of the three CTPs in existence with long enough operations for evaluation and strong similarities to climate CTPs, as well as all proposed and operating climate CTPs Using data from the Federal Energy Regulatory Commission (FERC) and Energy Information Administration (EIA), this study finds that “most of the environmental research in pollution abatement technologies was conducted by electric equipment manufacturers such as Babcock and Wilcox and not by utilities.”[30] Electric utilities, by contrast, “conducted very little pollution abatement research—rather the bulk of abatement expenditure was concentrated Draft – Please not cite or distribute without author’s permission – 4/7/0 on compliance issues and is thus not considered R&D.” In other words, according to the R&D expenditure data considered in [30], nonpolluting third-party firms are the primary sources of the innovations that are most relevant to resolving the pollution issues targeted by CTPs But many R&D programs not result in commercialized innovations To get a better sense of innovative activity at the intermediary step between invention and commercialization, it is helpful to turn to patent data Patents are required by law to publicly reveal the details of a completed invention that meets thresholds of novelty, usefulness, and non-obviousness Studies have shown that patenting activity parallels R&D expenditures, which are often difficult to find at a disaggregated enough level for research purposes, and can also be linked to events that occur outside the firm Surveys [31; 32; 33] demonstrate that 40–60% of the innovations detailed in patent applications are eventually used by firms This indicates that patents are probably best thought of as a well-accepted intermediary outcome of inventive activity, one that is tied both to the input of R&D expenditures and to hopes of commercialization See [34] for a review of the use of patent statistics as economic indicators, including some of their strengths and weaknesses This section focuses on identifying the “innovators” – as opposed to the “adopters” – of environmental technologies of relevance to CTPs, as revealed in published datasets of patents in the U.S Patent and Trademark Office (USPTO) system Before turning to the patent results, it briefly provides background information on the main technology strategies for combating the emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) – the pollutants that are the subject of the most prominent existing CTPs – as well as on five of the major technologies of relevance to GHG emissions from the electric utility sector Note that the appendix contains tables of the search terms used to put together the patent data, as well as details on the coding approach used to identify innovators; the data from these searches were first published in [28; 35; 36; 37].9 Emissions Reduction Technologies for Existing CTPs The emissions to the air of sulfur dioxide (SO2) and nitrogen oxides (NOx) are the primary focus of the existing CTPs that are most analogous to climate CTPs As these CTPs operate in the U.S., the technical descriptions here focus on the U.S., although many of the relevant technologies were developed in an international environmental regulatory context [for more on the international context, see 28; 39; 40] Several technology strategies can reduce sulfur dioxide (SO2) emissions, the primary U.S source of which has been coal-fired power plants since 1960 [see 41; 42].10 First, power Only one patent dataset included in this paper relies on a non-reviewed dataset This dataset, however, was used in [38] 10 SO2 is of concern for several reasons It is an eye, nose, and throat irritant, which in the extreme case has contributed to such infamous air pollution incidents as the “killer smogs” in Donora, Pennsylvania, in 1948 and London, England, in 1952 [43; 44] SO2 is also a significant secondary chemical component of the emerging public health issue of “ultra-fine” particles less than one micron in size, which can deposit deeply into the lungs and reside there up to several months [45] Finally, SO2 emissions are a major contributor to Draft – Please not cite or distribute without author’s permission – 4/7/0 plants can burn naturally lower-sulfur coals, although there are tradeoffs between the energy per unit mass – the heat content, or “heat input” to generators – of these coals and their sulfur content The delivered price of coal and the design of U.S boilers for specific coals have historically been constraints on the widespread use of this approach Other strategies that the electric power industry has pursued have included: (1) tall gas stacks that disperse emissions away from immediate areas but have acid rain tradeoffs; (2) “intermittent controls,” or operational adjustments that are used to reduce emissions in response to atmospheric conditions; (3) pre-combustion reduction of sulfur from fuels; 11 and (4) removal of SO2 from the post-combustion gas stream (otherwise known as “flue gas desulfurization” (FGD) systems or “scrubbing” technologies) 12 Since the 1960s, the focus has shifted away from tall stacks and intermittent controls, toward pre-combustion and post-combustion treatment technologies Electricity generation is also the largest stationary source of NOx emissions in the U.S., where it accounted for about 22% of overall emissions in 2002 [46].13 Of the various environmental problems associated with NOx, either singly or in conjunction with other pollutants, CTPs have focused on the role of NOx in helping to constitute tropospheric (ground-level) ozone (O3, commonly known as “smog”).14 NOx control strategies can generally be divided into two categories: (1) “combustion modification” processes that reduce the production of NOx emissions within the power plant; and (2) higher-cost and more effective “post-combustion” processes that decrease the NOx emitted by the power plant after combustion [see 28 for more information] Combustion modifications (also known as “primary measures”) for NOx control include burner optimization, air staging, flue gas recirculation, fuel staging, and low-NOx burners They generally require relatively little capital investment, not entail the use of chemical additives or reagents, and have typical NOx reduction capabilities of 30-60% Post-combustion processes (or “flue gas treatment”), on the other hand, use reagents, either via selective non-catalytic reduction (SNCR) or via selective catalytic reduction (SCR) technologies, to reduce the NOx in the flue gas downstream of the power plant furnace Typical NOx reduction capabilities are 30-50% for SNCR and 70-90% for SCR acidic deposition (or “acid rain”), with resulting damage to lakes, streams, plants, and forest growth 11 Pre-combustion technologies use physical, chemical or biological processes to “clean” coals; in commercial operation, they typically remove less than 30% of the sulfur 12 FGD systems contact a post-combustion gas stream with a base reagent (or “sorbent”) in an absorber in order to remove SO2 Although there are several system types (see figure in [27] for a full typology), the two main options are wet once-through processes that use limestone as the scrubbing reagent (about 72% of world capacity; forced oxidation systems make possible 95%+ SO2 removal efficiencies) and the cheaper lime spray drying process (about 8% of world capacity, capable of 80-90% SO2 removal efficiencies) Note that the costs of both wet and dry systems are higher in “retrofit” application to “existing” power plants, as opposed to “new” application to new power plants 13 Transportation is the main U.S emissions source, accounting for about 54% of emissions in 2002 [46] 14 NOx is an eye, nose, and throat irritant, a key constituent of acid rain, a contributor to the greenhouse effect (through both the indirect radiative forcing of ground-level O3 and the actions of one NOx, nitrous oxide (N2O)), and a significant secondary chemical component of ultra-fine particles In combination with sunlight and volatile organic compounds (VOCs), NOx is a key constituent of tropospheric ozone, one of the six criteria pollutants NAAQSs were established for under the 1970 CAA Draft – Please not cite or distribute without author’s permission – 4/7/0 systems Post-combustion NOx control technologies are more costly than combustion modifications, but both are more expensive in “retrofit” application to “existing” power plants, as opposed to “new” application to new power plants Technology Strategies for GHG Reductions from the Electric Power Sector There are two basic technology strategies that can be used to reduce the CO2 emissions – the most prominent (80%+) GHG implicated in climate change – from fossil fuel combustion In the first strategy, the focus is on retaining the existing fossil-fuel-fired combustion process (and upholding the investments that went into that process) while controlling emissions This can be done through pre-combustion and post-combustion interventions or reducing demand for generation In the context of electricity generation, considered to be 24% of global GHG emissions (mostly from CO2) [1], a pre-combustion intervention might involve fuel-switching from coal to natural gas, while a postcombustion intervention might involve carbon capture and sequestration (CCS) 15 Meanwhile, reducing the demand for electricity can be achieved through measures such as encouraging greater efficiency in end-use devices or by meeting some of the demand for power using end-use devices powered by alternatives to fossil-fuel fired generation An exemplar technology is domestic solar water heating (SWH), which was reportedly used in 2.5% of households worldwide by the end of 2004 [47].16 In the second main strategy, the focus is on a more significant shift away from fossil-fuelfired generation and to such generation alternatives as water, wind, sun, and nuclear power Three exemplar technologies are photovoltaic (PV) cells, solar thermal electric generation (STE), and wind power (Wind) In the generation of electricity, the most prominent solar energy technologies use either the photoelectric effect, as in the case of photovoltaic (PV) cells, or convert solar radiation to heat that then generates power through such mechanical means as driving a Stirling engine, as in the case of solar thermal electric (STE) power Wind power, on the other hand, converts the kinetic energy in wind into mechanical energy that is then converted to electricity Patent Ownership in CTP-Relevant Technologies Fig differentiates the patent owners in the seven technologies described above, as clustered by type of technology and type of organization The pollution control patents cover SO2 (pre-combustion technology combined with post-combustion technologies), NOx (combustion modification technologies combined with post-combustion technologies), and CCS technologies Alternative generation patents cover Wind, STE, and PV technologies And energy conservation patents cover SWH technologies Fig clearly shows that the most prevalent innovators in these pollution control, alternative 15 This latter, emerging technology, involves the separation and capture of CO2 from the flue gas stream of electric power plants and other industrial processes, which then needs to be managed either by injection into geologic formations (e.g., deep saline reservoirs, depleted oil and gas wells, unmineable coal seams) or in other repositories including (potentially) the world’s oceans Note that the capture aspect of CCS is analogous to FGD and SCR 16 SWH raises the temperature of a circulating working fluid – sometimes potable water – by exposing it to solar radiation In most cases, SWH systems work as hybrid systems in conjunction with a supplemental natural gas-powered or electric heater Draft – Please not cite or distribute without author’s permission – 4/7/0 generation, and energy conservation technologies are not the polluting firms that are the subjects of CTPs, but third-party non-polluting firms and individuals 17 Fig Patents in CTP-relevant technologies, by type of technology, as broken down by the percentages owned by various types of innovative organizations Existing CTPs and the Dynamics of Innovation This part of the paper considers the implications of the distinction between the innovators and the adopters of environmental technologies in an empirical treatment of the innovation dynamics under the three most prominent CTPs in existence that have lengthy-enough operations for evaluation and strong similarities to climate CTPs Most of the short history of CTPs is concentrated in the U.S., where a handful of programs have either substituted for or supplemented the pre-existing regulation of traditional air pollutants, most significantly sulfur dioxide (SO2) and nitrogen oxides (NOx) The three main CTPs in operation since the 1990s vary by pollutant and by governance level: “Title IV” is a national CTP for SO2 emissions; the Ozone Transport Commission/NOx Budget Program (“OTC/NBP”) is a seasonal and regional CTP for NOx emissions; and the Regional Clean Air Incentives Market (“RECLAIM”) is a southern California CTP for both NOx and SO2 emissions (the NOx program is more prominent and is discussed here) These CTPs cover similar emissions sources: in Title IV and the OTC/NBP, coal-fired power plants are the primary emitters that need to adopt technologies and other compliance strategies, while in RECLAIM, gas-fired power plants are an important, although not primary, emissions source Table provides an overview of these CTPs according to their major design elements The table also provides general information on observed market behavior during the operation of these CTPs The next section goes into this material in greater detail Table Overview of U.S CTPs 17 Patent citation analysis further shows that the patents held by non-CTP targets are at least as important as those of potential CTP targets See appendix for this data Draft – Please not cite or distribute without author’s permission – 4/7/0 Title IV Implementation of Cap Two phases Treatment of Banking Unlimited Allowance Price Behavior Lower than initially expected, with one large price spike OTC/NBP Multi-phase Restricted RECLAIM Annual reduction None Lower than initially expected, with two large price spikes Lower than initially expected, with one large price spike 4.1 Market Depth The initial firm reaction was autarkic (i.e to respond independently and perform only limited trading) [48] Today, Title IV is considered liquid The initial firm reaction was autarkic [49] Today, the NBP is considered liquid Thin [50] Pre-CTP Regulation of SO2 and NOx Emissions SO2 The U.S first regulated SO2 emissions in the 1970 Clean Air Act Amendments (CAA), which directed the newly formed Environmental Protection Agency (EPA) to establish National Ambient Air Quality Standards (NAAQS) for several “criteria” air pollutants in order to protect public health and welfare without consideration of economic or technical feasibility Each state had to develop a state implementation plan (SIP) for controlling existing stationary sources and submit it for EPA approval SIPS were submitted in 1972, and almost all called for continuous reduction of SO2 emissions, which in effect gave utilities the opportunity to use low sulfur fuels, pre-combustion treatment, or FGD systems to comply with the standards, rather than tall stacks or intermittent controls Meanwhile, major new sources (or significantly modified existing sources) of SO2 were to be subject to New Source Performance Standards (NSPS) based on the agency’s determination of whether relevant SO2 control technologies were adequately demonstrated for commercial use In the case of SO2 control, the EPA determined that scrubber technologies developed in Japan were demonstrated enough to provide the technology basis for standard-setting The 1971 NSPS set a maximum allowable emission rate of 1.2 lbs of SO2/MBtu heat input (2.2 kg/Gcal), a rate that effectively required 0-85% SO2 removal, depending on coal properties This standard was technologically flexible, as it could be met through the use of low sulfur fuels, precombustion treatment, and FGD systems The 1979 NSPS for SO2, however, required a 70% reduction of potential SO2 emissions from generation based on low sulfur coal and a 90% reduction of potential SO2 emissions from high sulfur coal This was not technologically flexible, as it essentially required that any new power plant operate a dry or wet scrubber, respectively, no matter the sulfur content of the fuel Note that existing sources were not subject to this requirement See [41] More than 70 bills were unsuccessfully introduced in Congress to reduce SO2 emissions from power plants after the 1979 NSPS before the passage of the 1990 CAA, which introduced the national CTP for SO2 control in Title IV [51] One of the most important successes of Title IV was its ability to overcome the political logjam that had arisen on SO2 emissions control in those years [40] Draft – Please not cite or distribute without author’s permission – 4/7/0 10 source wants to use banked allowances for compliance, only a portion of that source’s allowances can be redeemed on the basis of one allowance for each ton of emissions The rest are redeemed on the basis of two banked allowances for each ton of emissions The portion of banked allowances subject to the 2:1 requirement is set annually by the EPA, based on the amount by which the total bank exceeds the 10% threshold Flow control has applied in 2000-03 and 2005-07 To cope with the transition from the OTC to the NBP, all OTC allowances were officially retired, although the EPA created a small “compliance supplement pool” (CSP) of allowances for the NBP that most OTC states apportioned in exchange for banked OTC allowances There were a few exceptions: no 1999 vintage allowances were eligible for the CSP; Pennsylvania additionally excluded 2000 vintage allowances; and Maryland apportioned allowances according to an emissions-based formula instead of according to banked allowances [63] 5.3 RECLAIM RECLAIM, which replaced SCAQMD’s 1989 Rule 1135, was adopted in October 1993 after an extensive public comment process dating back to public program design workshops in October 1990 [64] EPA approved the program, which established CTPs for both NOx (targeted at a 75% reduction level) and SO2 (targeted at a 60% reduction level), under California’s SIP When it began, RECLAIM covered about 65% of NOx emissions from permitted stationary sources in the region (the equivalent of 17% of total NOx emissions in the region) and 85% of SO2 emissions from permitted stationary sources (31% of total SO2 emissions) RECLAIM Trading Credits (RTCs) were initially freely allocated on the basis of peak production rates that occurred between 1989 and 1992, prior to the recession that Southern California was experiencing when RECLAIM began This high emissions baseline meant that the cap did not require much of sources: in 1994 and 1995, allowances exceeded emissions by 58% and 40%, respectively [50] RECLAIM differs from the bigger U.S CTPs in several ways other than high initial allowance allocations First, it involves an annually declining cap rather than multi-year phases Through 2003, the annual decline was about 8% for NOx and 7% for SO2, based on 1994 levels Second, the penalties for emissions in excess of credits are not automatic, nor are they a set amount Non-complying facilities must surrender future RECLAIM Trading Credits (RTCs) to cover the excess emissions, and are also subject to significant civil penalties negotiated on a case-by-case basis (some of these fines have been substantial, including a $17 million fine for one company with over 300 tons (273 tonnes) of excess emissions) [50] Third, RECLAIM involves a wider range of sources than the other CTPs, including power generators, refineries, industrial sources, aerospace companies, asphalt producers, chemical plants, and cement plants emitting more than tons (3.64 tonnes) annually of each pollutant The program excludes certain “essential public services”, such as landfills, public transit, fire fighting facilities, etc Fourth, each RTC accounts for one pound (0.4 kg) of emissions, rather than one ton (0.91 tonnes) as in the other two CTPs Finally, there is no banking in RECLAIM, with each RTC expiring annually There is an opportunity for something akin to a very limited type of banking, however, due to the fact Draft – Please not cite or distribute without author’s permission – 4/7/0 14 that sources assigned to distinct, but overlapping, annual compliance cycles can trade with facilities in the other cycle, making two RTC vintages available for any time period within a compliance year [64] 6.1 Allowance Market Behavior Title IV In early 1992, the EPA announced Title IV allowance allocations and made it possible for firms to trade and to obtain allowances via a small annual auction held in March 1993 and 1994 The prices revealed in these auctions were considerably lower than the price estimates for Phase I, and were accurate, if initially disbelieved, predictors of the low, true Phase I allowance prices [58] These price expectations and true prices are depicted in Fig 2, Fig 3, and Fig 4, which use price estimates published in [49; 50; 51; 58], converted to August 2007 dollars using the Consumer Price Index (CPI) monthly data contained in [65] In cases in which only annual price estimates were available, the CPI from June of the relevant year was used for the conversion Fig 2, Fig 3, and Fig also uses true allowance prices from [66], as compiled in [67] and [68], converted to August 2007 dollars True allowance prices stayed much lower than expected until the start of 2004, when they increased rapidly until they peaked in December, 2005, returning to lower-than-expected levels in September 2006 Observers believe that this price run-up occurred due to uncertainty about the final details of the Clean Air Interstate Rule (CAIR), which requires further SO2 reductions from sources in many eastern states beginning in 2010 [55] Fig Actual versus expected allowance prices for Title IV, in August 2007 dollars Analysts believe that two main things have been behind the lower-than-expected prices of the majority of Title IV allowances First, substantial emission reductions were made before Phase I and in the early years of the program, when the high price expectations dominated decision-making on compliance options that either required significant lead times, like scrubbers, or involved long-term coal contracts Second, 75% of the allowances generated through Phase I were banked for use in future compliance, Draft – Please not cite or distribute without author’s permission – 4/7/0 15 regardless of phase, rather than traded [58] The bank generated in Phase I was so large that sources have been able to emit more than the aggregate allocated annual allowances throughout Phase II [55; 59] In effect, the banked allowances have acted to keep the price of allowances low by increasing the supply of allowances available in a given year In terms of market depth, the initial firm reaction to Title IV was autarkic, as firms perceived the market to be a program to comply with, not an opportunity for economic gain [48] Title IV is now considered to be a liquid market 6.2 OTC/NBP Fig presents price expectations and true prices in the OTC/NBP Although the majority of true allowance prices in the OTC/NBP were below estimates, two price spikes occurred in the OTC/NBP, one in mid-1998 to mid-1999, and the second in the first half of 2003 According to interviews reported in [49], the earlier spike occurred because, near the end of 1998, market participants thought that regulated firms had not installed enough control technology to meet the cap This resulted in a shortage of allowances and higher prices Prices dropped when plants in Massachusetts, New Hampshire, New Jersey, and Pennsylvania quickly installed control technology, early reduction allowances began to enter the market, and litigation and a consent order delayed the entry of several Maryland sources into the market The latter price spike is attributed in [49] to two things: (1) regulatory uncertainty stemming from “expectations and court-issued complications” to the program due to litigation by newly regulated firms under the NO x SIP Call; and (2) the desire of some sources to purchase allowances because they were uncertain about the performance of control technologies Fig Actual versus expected allowance prices for the OTC/NBP, in August 2007 dollars In terms of market depth, the initial firm reaction to the OTC trading phase was autarkic [49] The NBP is now considered to be a liquid market Draft – Please not cite or distribute without author’s permission – 4/7/0 16 6.3 RECLAIM As depicted in Fig 4, prices were far below expectations for the first six years of RECLAIM, as most companies had excess RTCs because of the initial allocation This situation lasted until a tremendous price spike occurred during most of 2000 and 2001 (RTCs peaked at $85,382 per ton [$93,826 per tonne] in December 2000) According to SCAQMD, three factors were primarily responsible for the spike: (1) increased demand for power related to the “California electricity crisis”; (2) the long-awaited “crossover point” between aggregate actual emissions and total allocations; and (3) delayed installation of control technology by RECLAIM participants, which was particularly noteworthy when compared to the requirements of Rule 1135 [50] Fig Actual versus expected allowance prices for RECLAIM, in August 2007 dollars In May, 2001, RECLAIM was significantly amended in response to the spike One of the major provisions was that power generators larger than 50 MW were required to install pollution control technologies by the end of 2003 and were no longer to be allowed to trade RTCs In January 2005, RECLAIM was amended again to: (1) continue to prohibit power generators from selling RTCs until the 2007 compliance year (to make sure that they could not flood the market with the additional RTCs they accrued by installing pollution control equipment); (2) allow generators to buy credits; (3) tighten RTC allocations for NOx in two phases, as long as the 12-month rolling average price of NOx RTCs does not exceed $15,000 per ton ($16,484 per tonne) In terms of market depth, RECLAIM is considered a thin market [50] Technology Innovation and Adoption Two aspects of innovation need to be considered in an assessment of the innovative conditions underlying these CTPs First, there should be a treatment of the real technologies and system changes that were introduced by polluting firms faced with the allowance prices and price expectations depicted above Second, the upstream innovative activity necessary to develop and commercialize technologies like scrubbers and Draft – Please not cite or distribute without author’s permission – 4/7/0 17 combustion modification equipment for later adoption by polluting firms should also be assessed 7.1 Technological System Changes and Canceled Technology Orders As has been well documented elsewhere, power plants complied with Title IV by: (1) switching to lower sulfur coals; (2) installing post-combustion control devices (“scrubbers”); and (3) using installed scrubbers more extensively [54; 69] During the trading phases of the OTC/NBP, power plants: (1) used nuclear and natural gas-fired power in the region more extensively; (2) purchased off-peak power from outside the OTC region; and (3) benefited from better-than-expected performance from combustion modification technologies installed in response to the preparatory traditional environmental regulation phase of the OTC/NBP [62; 70] In contrast, the initial allotment of allowances in RECLAIM was so much greater than actual emissions that the vast majority of sources did not have to change technologies in order to comply with the cap [50; 64] This situation lasted until May 2001, when regulators responded to a tremendous allowance price spike, attributed to the California electricity crisis, by removing power generators larger than 50 MWe from the CTP and requiring them to install control technology In each CTP, less control technology was employed than expected, as befits three situations in which most of the actual allowance prices were much lower than the expected prices [50; 58] In addition, in at least two of the three CTPs, lower-thanexpected prices resulted in significant cancellations of technology orders by emissions sources Low allowance prices under Title IV, coupled with low prices for low-sulfur coal, caused cancellations of initial scrubber orders on the order of 3,600 MWe of planned capacity [71] This was equivalent to 19% of the scrubber capacity brought online in the U.S in Phase I Scrubber cancellations even occurred in a case in which up to $35 million had already been spent on construction [58] Similarly, in RECLAIM, many power producers cancelled initial control equipment orders in favor of purchasing allowances [50; 64] 7.2 Patenting Declines As mentioned above, patents are probably best thought of as a well-accepted intermediary outcome of inventive activity, one that is tied both to the input of R&D expenditures and to hopes of commercialization As such, patent analysis is the most widely used technique in the literature to measure inventive output This section examines trends in patenting activity in four control technologies: post-combustion SO2 technology, pre-combustion SO2 technology, post-combustion NOx technology, and combustion modification NOx technology.21 It considers these trends across three eras: markets defined by traditional SO2 and NOx regulation, markets operating in preparation for trading in Title IV and the OTC/NBP, and markets defined by active trading under Title IV and the OTC/NBP RECLAIM is not considered here, primarily because of the small scope of the program 21 See the appendix for the search terms used to identify these patents Draft – Please not cite or distribute without author’s permission – 4/7/0 18 7.2.1 Dataset Construction To use patents as a proxy for inventive activity, it is important to back-date an issued patent as close to the time of invention as possible; this has traditionally been done by using the application date on a patent’s front page Recent evidence concerning the prominence in the overall USPTO dataset of “continuing” patent applications, or one of several different types of patent applications that cover new improvements or different aspects of an initial patent application but receive new application dates when filed, highlights the need to back-date issued patents to the initial patent application date, or the “Original U.S Priority Date” (see [72]) Approximately 22.7% of all USPTO patents are continuing patent applications, according to 1975-2001 data in [72], while 29.9% of patents in the SO2 dataset and 26.8% of patents in the NOx dataset are continuations In order to correct for this problem, the datasets analyzed here use Original U.S Priority Dates determined via two datasets: [72], for patents issued between 1/1/1975 and 12/31/2004, and Delphion for the rest An additional complication in patent dataset construction pertains to the treatment of pending patents The American Inventors Protection Act (AIPA) of 1999 requires publication – after the expiration of an 18-month period – of patent applications filed on or after November 29, 2000, unless an applicant requests that the invention not be published because it will not be filed in a foreign country in which inventions are subject to publication 18 months after filing, as occurs under the Patent Cooperation Treaty As a result, if a patent in an SO2 or NOx dataset was filed either before the AIPA, or after the AIPA but only in the U.S., it would not be published until it was issued (i.e., successfully scrutinized by a patent examiner, a process that can take a varying amount of time) This creates a problem for any study interested in analyzing relatively recent years of patent activity, as an undetermined number of patents may be pending publication at the time of study, and will therefore be unobservable But this situation is particularly likely to occur in the case of energy equipment suppliers; because of long-standing national security concerns regarding the electricity sector (true in many countries), these firms are typically in closed, long-standing relationships with domestic energy providers and have a greater reason to file patents domestically, rather than in foreign countries [40] In order to characterize the potential problem, pendency lag distributions – determined on a quarterly basis – were generated for each year, based on the Original U.S Priority Date of each patent in the SO2 and NOx technology dataset and the number of days it took each patent to be issued Fig portrays pendency lag distributions by the year of the Original U.S Priority Date (priority year) for the four technology datasets Note that between 1975 and 1997, over 70% of the priority years have patents with pendency lags of more than five years, while approximately 10% of the priority years have patents with pendency lags up to 10 years.22 22 The data presented here are only updated through September 30, 2007 Draft – Please not cite or distribute without author’s permission – 4/7/0 19 (a) Post-combustion SO2 control technology (c) Post-combustion NOx control technology (b) Pre-combustion SO technology (d) NOx combustion modification technology Priority years represented in figure: Fig Pendency lag distributions for the four patent datasets Draft – Please not cite or distribute without author’s permission – 4/7/0 20 Although ideally, the pendency lag distribution of a combined set of priority years not subject to the non-publication bias could be applied to correct the patent counts in priority years likely to be affected by that bias, a Kolmogorov-Smirnov test revealed that the relevant cumulative distribution functions (cdfs) were statistically dissimilar, for indeterminate reasons Instead, several patent trends were created for each technology dataset using sub-sets of the data that excluded all patents with pendency lags greater than x number of quarters, with x equivalent to the number of quarters between the end of the last year in the trend and March 31, 2008 7.2.2 Results Fig presents the results of using thirteen quarters as x.23 In all four sets of technologies considered, patenting levels reach their highest points in periods other than active trading More strikingly, instead of increasing, as might be expected if CTPs were better for innovation than traditional environmental regulation, patenting activity noticeably declines in each set of technologies during active trading (a) Post-combustion SO2 control technology (c) Post-combustion NOx control technology (b) Pre-combustion SO technology (d) NOx combustion modification technology Fig Patenting in SO2 and NOx emissions reduction technologies across three eras: markets defined by traditional environmental regulation, markets operating in preparation for trading, and markets defined by active trading under Title IV (a-b) and OTC/NBP (c-d) An examination of all of the USPTO Reclassification Alert Reports issued from October 1999 to June 2005 showed that there were no reclassifications that could have caused the trend in Fig In addition, the trends in Fig cannot readily be explained by trends in total USPTO patent applications and issues in 1975-2004, which are portrayed in Fig Finally, the diversity of the technologies depicted in Fig argues against them all reaching physical limits during this time, beyond which they cannot be improved 23 Cdfs of the four technology datasets, thirteen quarters captured 76.3% of the SO2 post-combustion patents, 76.8% of the SO2 pre-combustion patents, 82.4% of the NOx post-combustion patents, and 73.4% of the NOx combustion modification patents Draft – Please not cite or distribute without author’s permission – 4/7/08 21 Fig Total patent applications and issues in the USPTO, 1975-2004 Conclusion [To be written] Draft – Please not cite or distribute without author’s permission – 4/7/08 22 Appendix Dataset Construction Table and Table display the patent classes and definitions used in this analysis; these classes were used to generate the data for [42] and [28] The Delphion commercial patent database generated the data Table USPTO classes and subclasses that compose the SO2 dataset This dataset has been updated through March 31, 2008 USPC Class/ Subclasses 423/242.1-244.11 095/137 110/345 44/622-5* Definition of USPC Class/Subclasses Class 423, the “chemistry of inorganic compounds,” includes these subclasses representing the modification or removal of sulfur or sulfur-containing components of a normally gaseous mixture Class 095, “gas separation processes,” includes this subclass representing the solid sorption of sulfur dioxide or sulfur trioxide Class 110, “furnaces,” includes this subclass representing processes to treat fuel combustion exhaust gases, for example, in order to control pollution Class 044, “fuel and related compositions,” includes these subclasses to treat coal or a product thereof in order to remove “undesirable” sulfur Table USPTO classes and subclasses that compose the NOx dataset This dataset has been updated through March 31, 2008 USPC Class/ Subclasses 423/235, 239.1 122/4D 110/345, 347 431/4, 8-10 Definition of USPC Class/Subclasses Class 423, the “chemistry of inorganic compounds,” includes these subclasses representing (235) the modification or removal of nitrogen or nitrogenous components of a normally gaseous mixture, (239.1) including through use of a solid sorbent, catalyst, or reactant Class 122, “liquid heaters and vaporizers,” includes this subclass for miscellaneous boilers and boiler parts that are not otherwise classifiable Class 110, “furnaces,” includes these subclasses representing (345) processes to treat combustion exhaust gases, for example, in order to control pollution and (347) processes related to the burning of pulverized fuel Class 431, “combustion” includes these subclasses representing a combustion process or burner operation that includes (4) feeding an additive to a flame in order to give it a special characteristic; (8) flame shaping or distributing components in a combustion zone; (9) whirling, recycling, or reversing flow in an enclosed flame zone; (10) supplying a distinct stream of an oxidzer to a region of incomplete combustion Need to input terms for CCS, PV, STE, SWH, Wind as well as the update date Also need to explain how pre- and post- SO2 are different, and how combustion modification and post- NOx are as well Draft – Please not cite or distribute without author’s permission – 4/7/08 23 Coding by Assignee Type Seven patent datasets were coded by the following assignee types: (1) oil company; (2) utility, including the Electric Power Research Institute, Inc (EPRI); (3) transport & affiliated firms; (4) research institutions, including academic, government, and other; and (5) other firms & individual inventors These five overarching categories are amalgams of eleven underlying categories: (1) automakers and their direct subsidiaries; (2) companies either partnering with automakers on the patented research or in partial ownership relationships with automakers; (3) companies substantially involved in transportation research or manufacturing, but either without or unclear relationships with automakers; (4) individual inventors; (5) academic institutions; (6) local, regional, or national governmental bodies; (7) direct providers of electricity, natural gas, or water; (8) companies directly involved in the pumping and production of petroleum products; (9) non academic not-for-profit research institutions; (10) EPRI; (11) for-profit organizations not clearly subsidiary to any of the above classifications This last category includes large multinational engineering firms (e.g Babcock and Wilcox) which conduct large engineering and construction projects for a variety of firms, including oil companies and utilities, as well as small specialist firms Initial coding was conducted with a four-person team with some overlap for inter-rater reliability purposes The final round of coding was conducted by one person, under the supervision of the author, using [73] 10 Citation Analysis Need to paste results in here Also introduce with some variation of the following text: This technique uses the number of times a given “originating” patent is cited as legal “prior art” in subsequent patents (so-called forward citations) as a measure of technical importance Citation analysis has been widely used in the literature to assess the technical importance of inventions associated with patents (see, for example, Hall, Jaffe and Trajtenberg, 2001; Taylor, 2001; Harhoff, Narin and Scherer, 1999; Lanjouw & Schankerman,1999.; Albert Avery, Narin and McAllister, 1991; Carpenter, Narin, and Woolf, 1981; Jaffe, Trajtenberg, and Henderson, 1993; Narin, 1994a and 1994b; Narin and Olivastro, 1988; Trajtenberg, 1990) Draft – Please not cite or distribute without author’s permission – 4/7/08 24 References [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] N Stern, The Economics of Climate Change: The Stern Review, Cambridge University Press, Cambridge, UK, 2007 J.G Canadella, C.L Quere, M.R Raupacha, C.B Field, E.T Buitenhuis, Philippe Ciais, T.J Conway, N.P Gillett, R.A Houghton, and G Marland, Contributions to accelerating atmospheric CO2 growth from economic activity, carbon intensity, and efficiency of natural sinks Proceedings of the National Academy of Sciences (2007) J Hansen, M Sato, P Kharecha, G Russell, D.W Lea, and M Siddall, Climate change and trace gases Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences 365 (2007) 1925-1954 M Auffhammer, and R.T Carson, Forecasting the path of China's CO2 emissions using province level information Journal of Environmental Economics and Management In Press, Accepted Manuscript A.B Jaffe, R.G Newell, and R.N Stavins, Environmental policy and technological change Environmental & Resource Economics 22 (2002) 41-69 Z Griliches, The Search for Research-and-Development Spillovers Scandinavian Journal of Economics 94 (1992) S29-S47 C.I Jones, and J.C Williams, Measuring the Social Return to R&D Quarterly Journal of Economics 113 (1998) 1119-1135 W Chameides, and M Oppenheimer, Climate Change: Carbon Trading Over Taxes, 2007, pp 1670- R.O Zerbe, Theoretical Efficiency in Pollution Control Western Economic Journal (1970) 364-376 C Jung, K Krutilla, and R Boyd, Incentives for advanced pollution abatement technology at the industry level: An evaluation of policy alternatives Journal of Environmental Economics and Management 30 (1996) 95-111 S.R Milliman, and R Prince, Firms incentives to promote technological change in pollution control Journal of Environmental Economics and Management 16 (1989) 5257 P.B Downing, and L.J White, Innovation in Pollution Control Journal of Environmental Economics and Management 13 (1986) 18-29 J.T Wenders, Methods of Pollution Control and the Rate of Change in Pollution Abatement Technology Water Resources Research 11 (1975) 393–396 T Requate, and W Unold, Environmental policy incentives to adopt advanced abatement technology: Will the true ranking please stand up? European Economic Review 47 (2003) 125-146 C Fischer, I Parry, and W Pizer, Instrument choice of enviornmental protection when technological innovation is endogenous Journal of Environmental Economics and Management 45 (2003) 523-545 J.P Montero, Market structure and environmental innovation Journal of Applied Economics (2002) 293-325 D.A Malueg, Emissions Credit Trading and the Incentive to Adopt New Pollution Abatement Technology Journal of Environmental Economics and Management 16 (1989) 52-57 Draft – Please not cite or distribute without author’s permission – 4/7/08 25 [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] Y.K Bauman, The Effects of Environmental Policy on Technological Change in Pollution Control, Economics, University of Washington, Seattle, 2003, pp 71 N.O Keohane, Policy Instruments and the Diffusion of Pollution Control Technology, Harvard University, 1999 I.W.H Parry, Pollution Regulation and the Efficiency Gains from Technological Innovation Journal of Regulatory Economics 14 (1998) 229-254 F Gagelmann, and M Frondel, The Impact of Emission Trading on Innovation - Science Fiction or Reality? European Environment 15 (2005) 203-211 D.M Driesen, Does Emission Trading Encourage Innovation? Environmental Law Reporter 33 (2003) 10094-10108 R Kemp, Environmental policy and technical change: A comparison of the technological impact of policy instruments, Edward Elgar, Cheltenham, 1997 T.H Tietenberg, Emissions Trading: Principles and Practice, Resources for the Future, Washington D.C., 2006 D Burtraw, Innovation Under the Tradable Sulfur Dioxide Emission Permits in the U.S Electricity Sector, Resources for the Future, Washington D.C., 2000 D Popp, Pollution control innovations and the Clean Air Act of 1990 Journal of Policy Analysis and Management 22 (2003) 641-660 M.R Taylor, E.S Rubin, and D.A Hounshell, Control of SO2 Emission from Power Plants: A Case of Induced Technological Innovation in the U.S Technological Forecasting and Social Change 72 (2005) 697-718 S Yeh, E.S Rubin, M.R Taylor, and D.A Hounshell, Technology Innovations and Experience Curves for NOx Control Technologies Journal of the Air and Waste Management Association 55 (2005) 1827-1838 S Kerr, and R.G Newell, Policy-Induced Technology Adoption: Evidence from the U.S Lead Phasedown The Journal of Industrial Economics LI (2003) 317-43 P Sanyal, The effect of deregulation on environmental research by electric utilities Journal of Regulatory Economics 31 (2007) 335-353 G Napolitano, and G Sirilli, The Patent System and the Exploitation of Inventions: Results of a Statistical Survey Conducted in Italy Technovation 10 (1990) 5-16 F.M Scherer, and e al., Patents and the Corporation, Boston, 1959 G Sirilli, Patents and Inventors: An Empirical Study in: C Freeman, (Ed.), Output Measurement in Science and Technology, North-Holland, Amsterdam, 1987, pp 157-72 Z Griliches, Patent Statistics as Economic Indicators: A Survey Journal of Economic Literature 28 (1990) 1661-1707 M.R Taylor, E.S Rubin, and D.A Hounshell, Effect of government actions on technological innovation for SO2 control Environmental Science & Technology 37 (2003) 4527-4534 M.R Taylor, Thornton, D., Nemet G., Colvin, M., Government Actions and Innovation in Environmental Technology for Power Production: The Cases of Selective Catalytic Reduction and Wind Power in California, California Energy Commission, PIER EnergyRelated Environmental Research, Sacramento, CA, 2006 M.R Taylor, Nemet G., Colvin, M., Begley, L., Wadia, C., and Dillavou, T., Government Actions and Innovation in Clean Energy Technologies: The Cases of Photovoltaic Cells, Solar Thermal Electric Power, and Solar Water Heating, California Energy Commission, PIER Energy-Related Environmental Research, Sacramento, CA, 2007 Draft – Please not cite or distribute without author’s permission – 4/7/08 26 [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] E.S Rubin, Hounshell, D.A., Taylor, M.R., Yeh, S., Schrattenholzer, L., Riahi, K., Zhu, B., and Roehrl, R.A , The Effect of Government Actions on Environmental Technology Innovation: Applications to the Integrated Assessment of Carbon Sequestration Technologies A Progress Report Submitted to Dr John C Houghton, Office of Biological and Environmental Research, U.S Department of Energy Award No DEFG02-00ER63037, 2001 D Popp, International innovation and diffusion of air pollution control technologies: the effects of NOx and SO2 regulation in the US, Japan, and Germany Journal of Environmental Economics and Management 51 (2006) 46-71 D Wallace, Cleaning Coal, Environmental Policy and Industrial Innovation: Strategies in Europe, the U.S., and Japan, Royal Institute of International Affairs, London, U.K., 1995, pp 177-218 M.R Taylor, E.S Rubin, and D.A Hounshell, Regulation as the Mother of Innovation: The Case of SO2 Control Law and Policy 27 (2005) 31 M.R Taylor, The Influence of Government Actions on Innovative Activities in the Development of an Environmental Control Technology, Engineering & Public Policy, Carnegie Mellon University Pittsburgh, 2001 D.C Cooper, and F.C Alley, Air Pollution Control, a Control Design, Waveland Press, Inc., Prospect Heights, Il, 1994 L.P Snyder, (Ed.), The death-dealing smog over Donora, Pennsylvania: Industrial air pollution, public health, and federal policy, 1915-1963, University of Pennsylvania Electronic Dissertations, 1994 D.D Donaldson, and e al., Journal of Immunology 161 (1998) EPA, Current Emissions Trends Summaries from the NEI: 1970 - 2006 Average annual emissions, all criteria pollutants in MS Excel, United States Environmental Protection Agency, 2007 E Martinot, Renewables 2005 Global Status Report, The Worldwatch Institute for the REN21 Renewable Energy Policy Network, Washington, DC:, 2005 A.D Ellerman, From Autarkic to Market-Based Compliance: Learning from Our Mistakes in: R.F Kosobud, (Ed.), Emissions Trading, John Wiley & Sons, Inc., New York, 2000 A Farrell, Emissions Markets - Characteristics and Evolution, California Climate Change Center Report Series, Public Interest Energy Research, Berkeley, 2005 EPA, An Evaluation of the South Coast Air Quality Management District's Regional Clean Air Incentives Market - Lessons in Environmental Markets and Innovation in: O.A.R USEPA, (Ed.), United States Environmental Protection Agency, O.A.R, 2002 D Burtraw, Cost Savings, Market Performance, and Economic Benefits of the U.S Acid Rain Program, Resources for the Future, Washington, D.C., 1998 HEW, Control Techniques for Nitrogen Oxides from Stationary Sources, U.S Department of Health Education and Welfare, 1970 H Soud, Personal Communication in: M.R Taylor, (Ed.), London, 2001 R Schmalensee, P.L Joskow, A.D Ellerman, J.P Montero, and E.M Bailey, An interim evaluation of sulfur dioxide emissions trading Journal of Economic Perspectives 12 (1998) 53-68 EPA, Acid Rain Program 2005 Progress Report in: C.A.M.D O.A.R., (Ed.), U.S Environmental Protection Agency, 2006 Draft – Please not cite or distribute without author’s permission – 4/7/08 27 [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71] [72] [73] A.D Ellerman, P.L Joskow, R Schmalensee, J.P Montero, and E.M Bailey, Markets for Clean Air, Cambridge University Press, Cambridge, 2000 C de Jong, and K Walet, (Eds.), A Guide to Emissions Trading: Risk Management and Business Implications, Risk Books, London, 2004 B Swift, How Environmental Laws Work: An Analysis of the Utility Sector's Response to Regulation of Nitrogen Oxides and Sulftur Dioxide Under the Clean Air Act Tulane Environmental Law Journal 14 (2001) 115 D Burtraw, Appraisal of the SO2 Cap-and-Trade Market in: R.F Kosobud, (Ed.), Emissions Trading, John Wiley & Sons, Inc., New York, 2000 EPA, NOx Budget Trading Program: 2005 Compliance and Environmental Results in: A.Q.A.D Office of Air Quality Planning and Standards, (Ed.), United States Environmental Protection Agency, O.A.R., Washington, DC, 2006 W Pizer, Climate Policy Design Under Uncertainty in: M Schlesinger, (Ed.), HumanInduced Climate Change, Cambridge University Press, Forthcoming EPA, NOx Budget Trading Program: 2006 Compliance and Environmental Results in: C.A.M.D Office of Atmospheric Programs, (Ed.), United States Environmental Protection Agency, O.A.R., Washington, DC, 2007 EPA, Progressive Flow Control in the OTC NOx Budget Program: Issues to Consider at the Close of the 1999 to 2002 Period, United States Environmental Protection Agency, O.A.R., 2004 EPA, An Overview of the Regional Clean Air Incentives Market (RECLAIM) in: E.C.A.M Division, (Ed.), United States Environmental Protection Agency, 2006 BLS, Consumer Price Index All Urban Consumers (CPI-U), U.S Department of Labor, Bureau of Labor Statistics, 2007 Market Price Index, Cantor Fitzgerald, Various W Pizer, E-mail to the author with Cantor Fitzgerald NOx and SO2 market price data in: M.R Taylor, (Ed.), Berkely, 2007 J Schreifels, E-mail to the author with Cantor Fitzgerald NOx and SO2 market price data in: M.R Taylor, (Ed.), Berkeley, 2007 A.D Ellerman, and J.-P Montero, The Efficiency and Robustness of Allowance Banking in the U.S Acid Rain Program The Energy Journal 28 (2007) EPA, Ozone Transport Commission - NOx Budget Program: 1999-2002 Progress Report, United States Environmental Protection Agency, Office of Air and Radiation, Clean Air Markets Program, 2003 A.D Ellerman, R Schmalensee, P.L Joskow, J.P Montero, and E.M Bailey, Emission Trading Under the U.S Acid Rain Program: Evaluation of Compliance Costs and Allowance Market Performance, Center for Energy and Environmental Policy Research Massachusetts Institute of Technology, 1997 S.J Graham, Continuation, complementarity, and capturing value: Three studies exploring firms' complementary uses of appropriability mechanisms in technological innovation , Haas School of Business, University of California at Berkeley, Berkeley, CA, 2004 OneSource, OneSource Business Browser, 2007 Draft – Please not cite or distribute without author’s permission – 4/7/08 28 ... experience to draw on In the meantime, climate policy is rapidly evolving, and cap -and- trade programs (CTPs) for GHG mitigation are becoming the world’s dominant climate policy instrument, with the... operations for evaluation and strong similarities to climate CTPs, as well as all proposed and operating climate CTPs Using data from the Federal Energy Regulatory Commission (FERC) and Energy Information... Forecasting and Social Change 72 (2005) 697-718 S Yeh, E.S Rubin, M.R Taylor, and D.A Hounshell, Technology Innovations and Experience Curves for NOx Control Technologies Journal of the Air and Waste