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R&D Subsidies and Climate Policy: Is There a "Free Lunch"?

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  • David Popp
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    Abstract

    Because of the long-term nature of the climate problem, technological advances are often seen as an important component of any solution. However, when considering the potential for technology to help solve the climate problem, two market failures exist which lead to underinvestment in climate-friendly R&D: environmental externalities and the public goods nature of new knowledge. As a result, government subsidies to climate-friendly R&D projects are often proposed as part of a policy solution. Using the ENTICE model, I analyze the effectiveness of such subsidies, both with and without other climate policies, such as a carbon tax. While R&D subsidies do lead to significant increases in climate-friendly R&D, this R&D has little impact on the climate itself. Subsidies address the problem of knowledge as a public good, but they do not address the environmental externality, and thus offer no additional incentive to adopt new technologies. Moreover, high opportunity costs to R&D limit the potential role that subsidies can play. While R&D subsidies can improve efficiency, policies that directly affect the environmental externality have a much larger impact on both atmospheric temperature and economic welfare.

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    File URL: http://www.nber.org/papers/w10880.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10880.

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    Date of creation: Nov 2004
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    Publication status: published as Popp, David. "R&D Subsidies and Climate Policy: Is There a "Free Lunch"?" Climatic Change 77, 3-4 (August 2006): 311-341.
    Handle: RePEc:nbr:nberwo:10880

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    1. Coleman Bazelon & Kent Smetters, 1999. "Discounting Inside the Washington D.C. Beltway," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 213-228, Fall.
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    9. Popp, David, 2004. "ENTICE: endogenous technological change in the DICE model of global warming," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 742-768, July.
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    11. Austan Goolsbee, 1998. "Does Government R&D Policy Mainly Benefit Scientists and Engineers?," NBER Working Papers 6532, National Bureau of Economic Research, Inc.
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    16. David Popp, 2003. "Lessons from Patents: Using Patents To Measure Technological Change in Environmental Models," NBER Working Papers 9978, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Massimiliano Mazzanti & Roberto Zoboli, 2006. "Examining the Factors Influencing Environmental Innovations," Working Papers 2006.20, Fondazione Eni Enrico Mattei.
    2. Brian Roach, . "08-03 "Policies for Funding a Response to Climate Change"," GDAE Working Papers 08-03, GDAE, Tufts University.
    3. Marzio Galeotti & Carlo Carraro, 2004. "Does Endogenous Technical Change Make a Difference in Climate Policy Analysis? A Robustness Exercise with the FEEM-RICE Model," Working Papers 2004.152, Fondazione Eni Enrico Mattei.
    4. Hendrik Van den Berg, 2012. "Explaining neoclassical economists' pro-growth agenda: does the popular Solow growth model bias economic analysis?," International Journal of Pluralism and Economics Education, Inderscience Enterprises Ltd, vol. 3(1), pages 40-62.

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