Climate Policy and Innovation: A Quantitative Macroeconomic Analysis

Stephie Fried

American Economic Journal: Macroeconomics, 2018, vol. 10, issue 1, 90-118

Abstract: A carbon tax can induce innovation in green technologies. I evaluate the quantitative impact of this channel in a dynamic, general equilibrium model with endogenous innovation in fossil, green, and nonenergy inputs. I discipline the parameters using evidence from historical oil shocks, after which both energy prices and energy innovation increased substantially. I find that a carbon tax induces large changes in innovation. This innovation response increases the effectiveness of the policy at reducing emissions, resulting in a 19.2 percent decrease in the size of the carbon tax required to reduce emissions by 30 percent in 20 years.

Date: 2018
Note: DOI: 10.1257/mac.20150289
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