The effect of the California cap-and-trade on green innovation

Summary

Green technological change is important for sustainable growth. This thesis examines the effect of a Californian cap-and-trade climate policy on green innovation, an important driver of green technological change. The study does this by using a Synthetic Control Method, enabling a comparison with the counterfactual outcome of the policy not taking place. The policy started in 2013 and sets a cap on allowed level of emissions for large-emitting firms in California. The firms may buy and sell their allowances in a market for all participating firms, where supply and demand creates an allowance price. The study finds an initially significant positive effect of the policy on green technology patents – a measure of green innovation. Thereafter, the positive effect decreases, and also drowns in the overall increased trend of patenting and/or green patenting in USA. This does not conclude that the policy has been ineffective. The firms may have taken additional measures than innovation to decrease emissions.