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

Abstract: Current environmental policies have not performed effectively enough to mitigate climate change. Continuous evaluation of economic policy is imperative to close the gap between projected emission reductions and actual performance. This study examines California cap-and-trade, a market-based policy aiming to reduce emissions of heavy emitting firms in California. It evaluates its effects on green technological innovation – an important driver of green technological growth and decreased emission intensity. Doing this, it uses green technology patents as a proxy for green innovation, and applies a Synthetic Control Method (SCM) which creates a counterfactual outcome of California by a combination of other US states. The findings of this thesis suggest that the California cap-and-trade has significantly enhanced green innovation in California, compared with its synthetic counterfactual. However, the effect is merely short-term, which points out the importance of policy makers’ consideration of temporal dynamics of outcomes to ensure optimal policy effect. This requires continuous evaluation of the California cap-and-trade, to realize proper stringency and effectiveness in inducing green innovation. If doing so, cap-and-trade policy may be considered an efficient environmental policy in mitigating climate change and helping achieve long-term sustainability.