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Optimal CO2 Abatement in the Presence of Induced Technological Change

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  • Lawrence H. Goulder
  • Koshy Mathai
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    Abstract

    This paper explores the significance of policy-induced technological change for the design of carbon-abatement policies. We derive analytical expressions characterizing optimal CO2 abatement and carbon tax profiles under different specifications for the channels through which technological progress occurs. We consider both R&D-based and learning-by-doing-based knowledge accumulation, and examine each specification under both a cost-effectiveness and a benefit-cost policy criterion. We show analytically that the presence of induced technological change (ITC) implies a lower time profile of optimal carbon taxes. The impact of ITC on the optimal abatement path varies. When knowledge is gained through R&D investments, the presence of ITC justifies shifting some abatement from the present to the future. However, when knowledge is generated through learning-by-doing, the impact on the timing of abatement is analytically ambiguous. Illustrative numerical simulations indicate that the impact of ITC upon overall costs and optimal carbon taxes can be quite large in a cost-effectiveness setting but typically is much smaller under a benefit-cost policy criterion. The impact of ITC on the timing of abatement is very weak, and the effect (applicable in the benefit-cost case) on total abatement over time is generally small as well, especially when knowledge is accumulated via R&D.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6494.

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    Date of creation: Apr 1998
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    Publication status: published as REECON, Vol. 21, nos. 3-4 (August 1999): 211-253.
    Handle: RePEc:nbr:nberwo:6494

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    References

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    1. Grubb, Michael, 1997. "Technologies, energy systems and the timing of CO2 emissions abatement : An overview of economic issues," Energy Policy, Elsevier, vol. 25(2), pages 159-172, February.
    2. Alan Manne & Richard Richels, 1992. "Buying Greenhouse Insurance: The Economic Costs of CO2 Emission Limits," MIT Press Books, The MIT Press, edition 1, volume 1, number 026213280x, December.
    3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
    4. Farzin, Y. H., 1996. "Optimal pricing of environmental and natural resource use with stock externalities," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 31-57, October.
    5. Ulph, Alistair & Ulph, David, 1994. "The Optimal Time Path of a Carbon Tax," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 857-68, Supplemen.
    6. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
    7. William D. Nordhaus, 1980. "Thinking About Carbon Dioxide: Theoretical and Empirical Aspects of Optimal Control Strategies," Cowles Foundation Discussion Papers 565, Cowles Foundation for Research in Economics, Yale University.
    8. Repetto, Robert, 1987. "The policy implications of non-convex environmental damages: A smog control case study," Journal of Environmental Economics and Management, Elsevier, vol. 14(1), pages 13-29, March.
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    Cited by:
    1. Toman, Michael & Morgenstern, Richard & Anderson, John, 1998. "The Economics of "When" Flexibility in the Design of Greenhouse Gas Abatement Policies," Discussion Papers dp-99-38-rev, Resources For the Future.
    2. Paolo Buonanno & Carlo Carraro & Efrem Castelnuovo & Marzio Galeotti, 2001. "Emission Trading Restrictions with Endogenous Technological Change," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 1(3), pages 379-395, July.
    3. Laurie Michaelis, 1998. "Economic and Technological Development in Climate Scenarios," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 3(2), pages 231-261, December.
    4. Carraro, Carlo & Gerlagh, Reyer & Zwaan, Bob van der, 2003. "Endogenous technical change in environmental macroeconomics," Resource and Energy Economics, Elsevier, vol. 25(1), pages 1-10, February.
    5. Richard S.J. Tol & Wietze Lise & Benoit Morel & Bob C.C. van der Zwaan, 2001. "Technology Development And Diffusion And Incentives To Abate Greenhouse Gas Emissions," Working Papers FNU-6, Research unit Sustainability and Global Change, Hamburg University, revised Feb 2001.
    6. Jakeman, Guy & Hanslow, Kevin & Hinchy, Mike & Fisher, Brian S. & Woffenden, Kate, 2004. "Induced innovations and climate change policy," Energy Economics, Elsevier, vol. 26(6), pages 937-960, November.
    7. Gerlagh, Reyer & van der Zwaan, Bob, 2003. "Gross world product and consumption in a global warming model with endogenous technological change," Resource and Energy Economics, Elsevier, vol. 25(1), pages 35-57, February.

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