We analyze the incentives for polluting firms to diffuse and adopt advanced abatement technology under a system of tradable discharge permits in an international framework. With respect to the choice of the emission target we consider two settings. In the first setting, each country chooses its national emission target (and thereby the initial national permit endowment) noncooperatively. In the second setting, the global emission target is chosen cooperatively. The corresponding national endowments are determined according to a proportional emission reduction of baseline emissions. In both scenarios we consider three variants of permit allocation procedures (auctioning, benchmarking, and grandfathering).
We show that in both settings it depends on the permit allocation rule, whether the innovator promotes diffusion, taking into account the repercussion effects on environmental regulation.
