Innovation analysis under trading energy efficiency

Highlights: • This article addresses a theoretical analyze of TEE. • TEE has significant innovative effects. • TEE reduces marginal emission and total emission while promotes outputs. • TEE combined with carbon tax owns both higher energy efficiency and less total emission. • The policy implication of these conclusions is to encourage TEE combined with carbon tax. -- Abstract: Trading energy efficiency (TEE) is adopted by more and more countries to cope with global climate change. This article studies the effects of TEE by investigating an optimization model, and several interesting conclusions are obtained. Firstly, it is observed in the model that TEE stimulates energy efficiency innovation, that is, promotes the firms to increase innovation investments. Secondly, it is proved that TEE reduces the marginal emission and total emission of the firms, while outputs are promoted by TEE. Meanwhile, TEE does not reduce energy inputs. Finally, TEE under carbon tax performs better than that without carbon tax. Based on these results, to improve the energy efficiency and reduce the emission of greenhouse gases, it is suggested for the governments to adopt TEE with carbon tax.