EMISSION TRADING SYSTEMS AND TECHNOLOGICAL INNOVATION A Random Matching Model

The present chapter paper investigates the functioning of an emission trading system and its impact on the diffusion of environmentally friendly technological innovation in the presence of firms' strategic behaviors and sanctions to non compliant firms. For this purpose, we study an evolutionary game model with random matching, namely, a context in which firms interact through pairwise random matchings and have to decide whether to adopt a new clean technology or keep using the old technology that requires pollution permits to operate. We investigate the technological dynamics emerging from the model and show that by properly modifying the penalty on non compliant firms, it is possible to shift from one dynamic regime to another, increase permits trade, and promote the diffusion of innovative technologies