A study of successful cap-and-trade schemes published in the Proceedings of the National Academies of Science found that cap-and-trade policies – a widely favored tool in climate change mitigation – do not necessarily provide sufficient incentives for firms to innovative environmentally-preferable processes and technologies. This finding is significant, as a central argument in favor of cap-and-trade schemes is that they provide price signals that lead firms toward innovation.

The study’s author, Margaret Taylor, a researcher at Lawrence Berkeley National Laboratory, notes that compliance costs are frequently overestimated by firms and policymakers during the cap-and-trade schemes’ formulation. Because of this, capped firms are often able to meet their compliance obligations in a variety of existing, cost-effective ways before trading begins, allowing them to bank – save for later use or sale – compliance credits. This supply of banked credits leads to a saturated credit market and low prices, which means that it’s often more cost-effective for firms used their saved credits or purchase credits rather than innovate new processes and technologies that would help them comply.

What do you make of this study? Does it undermine cap-and-trade schemes as a policy tool, or merely reinforce the idea that they must be well-designed to be effective?