Climate policy and dynamic efficiency gains A case study on Norwegian CO2-taxes and technological innovation in the petroleum sector

Against increasing scientific evidence of human-induced global warming, and prevailing uncertainties regarding the fate of the Kyoto Protocol, the use of environmental taxes has been gaining increasing popularity in the OECD region. Economists often conjecture that such instruments provide a continuous incentive for technological innovation, which is likely to be a key determinant for success or failure in climate policy, at least in the long turn. However, there is little empirical evidence available to justify claims of that kind. The objective of this paper is to provide such evidence, by assessing the impacts of Norwegian CO(2)-taxes, the key instrument in Norway's climate policy, on technological innovation in upstream petroleum operations. The balance of evidence suggests that the introduction of CO(2)-taxes has provided some incentive for innovation that has shifted petroleum operations in a less emission-intensive direction. That said, the pattern of technological change pertains mostly to incremental process innovations, cumulative improvements, and adaptations of technologies already available. These insights may assist policymakers when formulating policy strategies and selecting instruments for climate change mitigation.