Directed Technical Change and Climate Policy

Vincent M. Otto, Andreas Löschel and John Reilly
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Vincent M. Otto: Wageningen University and MIT

No 2006.81, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper studies the cost effectiveness of climate policy if there are technology externalities. For this purpose, we develop a forward-looking CGE model that captures empirical links between CO2 emissions associated with energy use, directed technical change and the economy. We find the cost-effective climate policy to include a combination of R&D subsidies and CO2 emission constraints, although R&D subsidies raise the shadow value of the CO2 constraint (i.e. CO2 price) because of a strong rebound effect from stimulating innovation. Furthermore, we find that CO2 constraints differentiated toward CO2-intensive sectors are more cost effective than constraints that generate uniform CO2 prices among sectors. Differentiated CO2 prices, through technical change and concomitant technology externalities, encourage growth in the non-CO2 intensive sectors and discourage growth in CO2-intensive sectors. Thus, it is cost effective to let the latter bear relatively more of the abatement burden. This result is robust to whether emission constraints, R&D subsidies or combinations of both are used to reduce CO2 emissions.

Keywords: Directed Technical Change; Climate Policy; Computable General Equilibrium Model; R&D (search for similar items in EconPapers)
JEL-codes: D58 H21 H23 O33 O38 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-ene, nep-env and nep-pbe
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Citations: View citations in EconPapers (7)

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Working Paper: Directed Technical Change and Climate Policy (2006)
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