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Innovation under cap-and-trade programs.

ABSTRACT: Policies incentivizing the private sector to reach its innovative potential in "clean" technologies are likely to play a key role in achieving climate stabilization. This article explores the relationship between innovation and cap-and-trade programs (CTPs)--the world's most prominent climate policy instrument--through empirical evidence drawn from successful CTPs for sulfur dioxide and nitrogen oxide control. The article shows that before trading began for these CTPs, analysts overestimated the value of allowances in a pattern suggestive of the frequent a priori overestimation of the compliance costs of regulation. When lower-than-expected allowance prices were observed, in part because of the unexpected range of abatement approaches used in the lead-up to trading, emissions sources chose to bank allowances in significant numbers and reassess abatement approaches going forward. In addition, commercially oriented inventive activity declined for emissions-reducing technologies with a wide range of costs and technical characteristics, dropping from peaks before the establishment of CTPs to nadirs a few years into trading. This finding is consistent with innovators deciding during trading that their research and development investments should be reduced, based on assessments of future market conditions under the relevant CTPs. The article concludes with a discussion of the results and their implications for innovation and climate policy.

SUBMITTER: Taylor MR

PROVIDER: S-EPMC3323980 | biostudies-literature |

REPOSITORIES: biostudies-literature

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Project description:The role of cost-effectiveness analysis (CEA) in incentivizing innovation is controversial. Critics of CEA argue that its use for pricing purposes disregards the 'value of innovation' reflected in new drug development, whereas supporters of CEA highlight that the value of innovation is already accounted for. Our objective in this article is to outline the limitations of the conventional CEA approach, while proposing an alternative method of evaluation that captures the value of innovation more accurately. The adoption of a new drug benefits present and future patients (with cost implications) for as long as the drug is part of clinical practice. Incidence patients and off-patent prices are identified as two key missing features preventing the conventional CEA approach from capturing 1) benefit to future patients and 2) future savings from off-patent prices. The proposed CEA approach incorporates these two features to derive the total lifetime value of an innovative drug (i.e., the value of innovation). The conventional CEA approach tends to underestimate the value of innovative drugs by disregarding the benefit to future patients and savings from off-patent prices. As a result, innovative drugs are underpriced, only allowing manufacturers to capture approximately 15% of the total value of innovation during the patent protection period. In addition to including the incidence population and off-patent price, the alternative approach proposes pricing new drugs by first negotiating the share of value of innovation to be appropriated by the manufacturer (>15%?) and payer (<85%?), in order to then identify the drug price that satisfies this condition. We argue for a modification to the conventional CEA approach that integrates the total lifetime value of innovative drugs into CEA, by taking into account off-patent pricing and future patients. The proposed approach derives a price that allows manufacturers to capture an agreed share of this value, thereby incentivizing innovation, while supporting health-care systems to pursue dynamic allocative efficiency. However, the long-term sustainability of health-care systems must be assessed before this proposal is adopted by policy makers.

Project description:BackgroundPolicies to mitigate climate change by reducing greenhouse gas (GHG) emissions can yield public health benefits by also reducing emissions of hazardous co-pollutants, such as air toxics and particulate matter. Socioeconomically disadvantaged communities are typically disproportionately exposed to air pollutants, and therefore climate policy could also potentially reduce these environmental inequities. We sought to explore potential social disparities in GHG and co-pollutant emissions under an existing carbon trading program-the dominant approach to GHG regulation in the US and globally.Methods and findingsWe examined the relationship between multiple measures of neighborhood disadvantage and the location of GHG and co-pollutant emissions from facilities regulated under California's cap-and-trade program-the world's fourth largest operational carbon trading program. We examined temporal patterns in annual average emissions of GHGs, particulate matter (PM2.5), nitrogen oxides, sulfur oxides, volatile organic compounds, and air toxics before (January 1, 2011-December 31, 2012) and after (January 1, 2013-December 31, 2015) the initiation of carbon trading. We found that facilities regulated under California's cap-and-trade program are disproportionately located in economically disadvantaged neighborhoods with higher proportions of residents of color, and that the quantities of co-pollutant emissions from these facilities were correlated with GHG emissions through time. Moreover, the majority (52%) of regulated facilities reported higher annual average local (in-state) GHG emissions since the initiation of trading. Neighborhoods that experienced increases in annual average GHG and co-pollutant emissions from regulated facilities nearby after trading began had higher proportions of people of color and poor, less educated, and linguistically isolated residents, compared to neighborhoods that experienced decreases in GHGs. These study results reflect preliminary emissions and social equity patterns of the first 3 years of California's cap-and-trade program for which data are available. Due to data limitations, this analysis did not assess the emissions and equity implications of GHG reductions from transportation-related emission sources. Future emission patterns may shift, due to changes in industrial production decisions and policy initiatives that further incentivize local GHG and co-pollutant reductions in disadvantaged communities.ConclusionsTo our knowledge, this is the first study to examine social disparities in GHG and co-pollutant emissions under an existing carbon trading program. Our results indicate that, thus far, California's cap-and-trade program has not yielded improvements in environmental equity with respect to health-damaging co-pollutant emissions. This could change, however, as the cap on GHG emissions is gradually lowered in the future. The incorporation of additional policy and regulatory elements that incentivize more local emission reductions in disadvantaged communities could enhance the local air quality and environmental equity benefits of California's climate change mitigation efforts.

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Innovation under cap-and-trade programs.

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