  This paper analyzes the dynamic incentives for technology adoption under a
transferable permits system, which allows for strategic trading on the permit
market. Initially, firms can invest both in low-emitting production
technologies and trade permits. In the model, technology adoption and allowance
price are generated endogenously and are inter-dependent. It is shown that the
non-cooperative permit trading game possesses a pure-strategy Nash equilibrium,
where the allowance value reflects the level of uncovered pollution (demand),
the level of unused allowances (supply), and the technological status. These
conditions are also satisfied when a price support instrument, which is
contingent on the adoption of the new technology, is introduced. Numerical
investigation confirms that this policy generates a floating price floor for
the allowances, and it restores the dynamic incentives to invest. Given that
this policy comes at a cost, a criterion for the selection of a self-financing
policy (based on convex risk measures) is proposed and implemented.
