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Timing of innovation policies when carbon emissions are restricted: an applied general equilibrium analysis

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  • Tom-Reiel Heggedal
  • Karl Jacobsen

    ()
    (Statistics Norway)

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    Abstract

    This paper studies the timing of subsidies for environmental research and development (R&D) and how innovation policy is influenced by the costs of emissions. We use a dynamic computable general equilibrium (CGE) model with both general R&D and specific environmental R&D. We find two results that are important when subsidizing environmental R&D in order to target inefficiencies in the research markets. Firstly, the welfare gain from subsidies is larger when the costs of emissions are higher. This is because a high carbon tax increases the social (efficient) investment in environmental R&D, in excess of the private investment in R&D. Secondly, the welfare gain is greater when there is a falling time profile of the rate of subsidies for environmental R&D, rather than a constant or increasing profile. The reason is that the innovation externalities are larger in early periods.

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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 536.

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    Date of creation: Apr 2008
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    Handle: RePEc:ssb:dispap:536

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    Keywords: Applied general equilibrium; endogenous growth; research and development; carbon emissions.;

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    1. Reyer Gerlagh & Snorre Kverndokk & Knut Einar Rosendah, 2008. "Linking Environmental and Innovation Policy," Working Papers 2008.53, Fondazione Eni Enrico Mattei.
    2. Norrbin, Stefan C, 1993. "The Relation between Price and Marginal Cost in U.S. Industry: A Contradiction," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1149-64, December.
    3. Charles I. Jones & John C. Williams, 1999. "Too Much of a Good Thing? The Economics of Investment in R&D"," Working Papers 99015, Stanford University, Department of Economics.
    4. Parry, Ian W. H., 1995. "Optimal pollution taxes and endogenous technological progress," Resource and Energy Economics, Elsevier, vol. 17(1), pages 69-85, May.
    5. Diao, Xinshen & Roe, Terry & Yeldan, Erinc, 1999. "Strategic policies and growth: an applied model of R&D-driven endogenous growth," Journal of Development Economics, Elsevier, vol. 60(2), pages 343-380, December.
    6. Gillingham, Kenneth T. & Newell, Richard G. & Pizer, William A., 2007. "Modeling Endogenous Technological Change for Climate Policy Analysis," Discussion Papers dp-07-14, Resources For the Future.
    7. Keller, Wolfgang, 2002. "International Technology Diffusion," CEPR Discussion Papers 3133, C.E.P.R. Discussion Papers.
    8. Mads Greaker & Knut Einar Rosendahl, 2006. "Strategic Climate Policy in Small, Open Economies," Discussion Papers 448, Research Department of Statistics Norway.
    9. Knut Einar Rosendahl, 2002. "Cost-effective environmental policy: Implications of induced technological change," Discussion Papers 314, Research Department of Statistics Norway.
    10. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
    11. D. Leahy & J. P. Neary, 1997. "R&D spillovers and the case for industrial policy in an open economy," LSE Research Online Documents on Economics 20342, London School of Economics and Political Science, LSE Library.
    12. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May.
    13. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
    14. Goulder, Lawrence H. & Schneider, Stephen H., 1999. "Induced technological change and the attractiveness of CO2 abatement policies," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 211-253, August.
    15. Stavins, Robert & Jaffe, Adam & Newell, Richard, 2004. "A Tale of Two Market Failures: Technology and Environmental Policy," Discussion Papers dp-04-38, Resources For the Future.
    16. Fischer, Carolyn & Newell, Richard, 2004. "Environmental and Technology Policies for Climate Mitigation," Discussion Papers dp-04-05, Resources For the Future.
    17. Hart, Rob, 2008. "The timing of taxes on CO2 emissions when technological change is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 55(2), pages 194-212, March.
    18. Parry, Ian & Pizer, William & Fischer, Carolyn, 2000. "How Important is Technological Innovation in Protecting the Environment?," Discussion Papers dp-00-15, Resources For the Future.
    19. Kverndokk, Snorre & Rosendahl, Knut Einar, 2007. "Climate policies and learning by doing: Impacts and timing of technology subsidies," Resource and Energy Economics, Elsevier, vol. 29(1), pages 58-82, January.
    20. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
    21. Hwan C . Lin & Benjamin Russo, 2002. "Growth Effects of Capital Income Taxes: How Much Does Endogenous Innovation Matter?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 613-640, October.
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    Cited by:
    1. Brita Bye & Karl Jacobsen, 2009. "On general versus emission saving R&D support," Discussion Papers 584, Research Department of Statistics Norway.
    2. Tom-Reiel Heggedal, 2008. "On R&D and the undersupply of emerging versus mature technologies," Discussion Papers 571, Research Department of Statistics Norway.

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