Lior Shabtai

Presentations: Kellogg Finance Brownbag (2025, 2026), Kellogg Strategy Brownbag (2026)

Abstract. This paper shows that carbon markets inadvertently weaken incentives for green innovation in hard-to-abate industries by allowing firms to rely on purchasing emission allowances rather than independently decarbonizing. A triple-difference analysis of the European Union Emissions Trading System (EU-ETS) finds that the rise in green patenting is concentrated among easy-to-abate firms, with no comparable increase among hard-to-abate firms. A directed technical change model of a carbon market with sectoral differences in abatement costs shows that carbon markets inefficiently direct most innovation efforts toward decarbonizing the easy-to-abate sector. Socially optimal sector-specific research subsidies redirect innovation to support a clean transition in the hard-to-abate sector and increase welfare by 3.8% in consumption-equivalent terms. These subsidies need to be nearly three times as large (in present value) as those provided to innovators in the easy-to-abate sector.

Presentations: CEPR Climate Change and the Environment Symposium (CCES) 2026, BI/NBER/NYU Climate and Nature Finance (2026, poster), MFA (2026), Kellogg Finance Brownbag (2024, 2025)