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Climate policy and induced R&D: How great is the effect?

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  • Shiell, Leslie
  • Lyssenko, Nikita

Abstract

Carbon taxes or tradable permit systems to address climate change may induce research and development in energy-related technologies. We construct a single-knowledge-stock model of R&D, growth and climate to assess the importance of this effect. The contribution of induced R&D is shown to be very sensitive to (i) the duplication externality, (ii) the feasibility of dedicated research subsidies to internalize inter-firm knowledge spillovers, (iii) the opportunity cost of R&D, (iv) the initial level of research expenditure, and (v) the elasticity of substitution between energy and other factors of production. In contrast, the direction and scale of the inter-temporal research spillover are of secondary importance. We find strong support for Rezai's (2011) argument that, when the business-as-usual scenario (no policy) is modeled appropriately (all externalities treated as external), sacrifices for early generations associated with optimal climate policy are minor or non-existent. Employing our preferred selections for the parameters, we find that adding an induced R&D component to the model increases the welfare impact of the first-best policy (optimally chosen carbon tax and research subsidies) by an average value of more than 400%, and of the second-best policy (carbon tax alone) by approximately 22%.

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  • Shiell, Leslie & Lyssenko, Nikita, 2014. "Climate policy and induced R&D: How great is the effect?," Energy Economics, Elsevier, vol. 46(C), pages 279-294.
    • Handle: RePEc:eee:eneeco:v:46:y:2014:i:c:p:279-294
    DOI: 10.1016/j.eneco.2014.09.017
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    2. Zhang, Kun & Wang, Qian & Liang, Qiao-Mei & Chen, Hao, 2016. "A bibliometric analysis of research on carbon tax from 1989 to 2014," Renewable and Sustainable Energy Reviews, Elsevier, vol. 58(C), pages 297-310.
    3. He, Pinglin & Zhang, Shuhao & Wang, Lei & Ning, Jing, 2023. "Will environmental taxes help to mitigate climate change? A comparative study based on OECD countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1440-1464.

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    More about this item

    Keywords

    Induced technological change; Climate policy modeling;

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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