Directed Technical Change and Climate Policy

41 Pages Posted: 28 Mar 2006

See all articles by Vincent M. Otto

Vincent M. Otto

affiliation not provided to SSRN

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics

John M. Reilly

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change

Date Written: June 2006

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

JEL Classification: D58, H21, H23, O33, O38

Suggested Citation

Otto, Vincent M. and Löschel, Andreas and Reilly, John M., Directed Technical Change and Climate Policy (June 2006). FEEM Working Paper No. 81.2006, Available at SSRN: https://ssrn.com/abstract=889325 or http://dx.doi.org/10.2139/ssrn.889325

Vincent M. Otto (Contact Author)

affiliation not provided to SSRN

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/eroe

John M. Reilly

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change ( email )

E19-429
77 Massachusetts Ave
Cambridge, MA 02139
United States
617-253-8040 (Phone)

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