Optimal Environmental Policy Design In The Presence Of Uncertainty And Technology Spillovers
AbstractThe stylized model presented in this paper extends the approach developed by Fischer and Newell (2008) by analysing the optimal policy design in a context with more than one externality while taking explicitly into account uncertainty surrounding future emission damage costs. In the presence of massive uncertainties and technology spillovers, well-designed sup-port mechanisms for renewables are found to play a major role, notably as a means for compensating for technology spillovers, yet also for reducing the investorsâ€™ risks. How-ever, the design of these support mechanisms needs to be target-aimed and well-focused. Besides uncertainty on the state of the world concerning actual marginal emission damage, we consider the technological progress through R&D as well as learning-by-doing. A portfolio of three policy instruments is then needed to cope with the existing externalities and optimal instrument choice is shown to be dependent on risk aversion of society as a whole as well as of entrepreneurs. To illustrate the role of uncertainty for the practical choice of policy instruments, an em-pirical application is considered. The application is calibrated to recent global data from IEA and thus allows identifying the main drivers for the optimal policy mix. In addition to assumptions on technology costs and uncertainty of emission damage cost, the impor-tance of technology spillover clearly plays a key role. Yet under some plausible parame-ter settings, direct subsidies to production are found to be of lower importance than very substantial R&D supports.
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Bibliographic InfoPaper provided by University of Duisburg-Essen, Chair for Management Science and Energy Economics in its series EWL Working Papers with number 1102.
Length: 21 pages
Date of creation: Mar 2011
Date of revision: Mar 2011
Externality; technology; learning; uncertainty; climate change; spillover; renewable energy; policy;
Find related papers by JEL classification:
- O38 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Government Policy
- Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-03-19 (Agricultural Economics)
- NEP-ALL-2011-03-19 (All new papers)
- NEP-ENE-2011-03-19 (Energy Economics)
- NEP-ENV-2011-03-19 (Environmental Economics)
- NEP-REG-2011-03-19 (Regulation)
- NEP-RES-2011-03-19 (Resource Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stavins, Robert & Jaffe, Adam & Newell, Richard, 2004.
"A Tale of Two Market Failures: Technology and Environmental Policy,"
dp-04-38, Resources For the Future.
- Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2005. "A tale of two market failures: Technology and environmental policy," Ecological Economics, Elsevier, vol. 54(2-3), pages 164-174, August.
- Bläsi, Albrecht & Requate, Till, 2007. "Subsidies for Wind Power: Surfing down the Learning Curve?," Economics Working Papers 2007,28, Christian-Albrechts-University of Kiel, Department of Economics.
- Mohajan, Haradhan, 2011. "Optimal Environmental Taxes Due to Health Effect," MPRA Paper 50672, University Library of Munich, Germany, revised 17 Apr 2011.
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