Environmental Policy in the Presence of Induced Technological Change

Antung Anthony Liu () and Hiroaki Yamagami
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Antung Anthony Liu: Indiana University School of Public and Environmental Affairs

Environmental & Resource Economics, 2018, vol. 71, issue 1, No 13, 279-299

Abstract: Abstract We examine the hypothesis that induced technological change (ITC) can dramatically lower the cost of a carbon tax in a static optimal tax model. The research and development sector is represented by an aggregate stock of energy-saving technology, which acts as a weak substitute with a polluting resource in the energy generation sector. Using this model, we analytically show how ITC occurs and affects the cost of a carbon tax. Applying quantitative estimates of the size of ITC to numerical simulations calibrated to the US economy, we find that existing empirical evidence can reduce the welfare cost of environmental tax reform by 12%. Our tests of alternative parameters show that this result is highly sensitive to the assumptions used, suggesting that ITC could result in much larger reductions in cost.

Keywords: Induced technological change; Double dividend; Carbon taxes; Optimal environmental tax; Returns to specialization (search for similar items in EconPapers)
JEL-codes: H21 Q41 Q54 Q55 Q58 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10640-017-0150-7

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