A Dynamic Crediting Regime for Joint Implementation to Foster Innovation in the Long Term

Joint Implementation is a theoretically efficient instrument of climate policy at least in the short run. This need not apply for the long run. Joint Implementation can reduce innovation in the industrialized countries because of reduced incentives for emission reduction. To realize short run efficiency gains and to avoid long run efficiency losses, we need a ‘strategic’ climate policy. This policy should start with full crediting of Joint Implementation allowing short-run efficiency gains which can foster technology transfer and thus lead to ‘leapfrogging’ by developing countries. Over time, the crediting ratio should be gradually reduced while domestic carbon taxes are raised. Experiences from the second oil shock have shown that energy-saving innovation is positively correlated to energy prices. Both, the reduced crediting and the raising domestic carbon tax, will therefore lead to long-run innovation.