How Does Climate Policy Affect Technical Change? An Analysis of the Direction and Pace of Technical Progress in a Climate-Economy Model

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How Does Climate Policy Affect Technical Change? An Analysis of the Direction and Pace of Technical Progress in a Climate-Economy Model

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Lea Nicita (Fondazione Eni Enrico Mattei)
Carlo Carraro (University of Venice, Fondazione Eni Enrico Mattei, CEPR, CEPS, CESifo and CMCC)
Emanuele Massetti (Fondazione Eni Enrico Mattei)

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Abstract

This paper analyses whether and how a climate policy designed to stabilize greenhouse gases in the atmosphere is likely to change the direction and pace of technical progress. The analysis is performed using an upgraded version of WITCH, a dynamic integrated regional model of the world economy. In this version, a non-energy R&D Sector, which enhances the productivity of the capital-labor aggregate, has been added to the energy R&D sector included in the original WITCH model. We find that, as a consequence of climate policy, R&D is re-directed towards energy knowledge. Nonetheless, total R&D investments decrease, due to a more than proportional contraction of non-energy R&D. Indeed, when non-energy and energy inputs are weakly substitutable, the overall contraction of the economic activity associated with a climate policy induces a decline in total R&D investments. However, enhanced investments in energy R&D and in the energy sector are found not to “crowd-out” investments in non-energy R&D.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.8.

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Date of creation: Jan 2009
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Handle: RePEc:fem:femwpa:2009.8

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-05-23 (All new papers)
NEP-ENE-2009-05-23 (Energy Economics)
NEP-ENV-2009-05-23 (Environmental Economics)
NEP-MIC-2009-05-23 (Microeconomics)

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