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Optimal CO2 abatement and technological change. Should emission taxes start high in order to spur R&D?

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Abstract

Many European politicians argue that since technological development is needed to solve the climate problem, the EU should take the lead and set tougher emission targets than what is required by the Kyoto protocol. Moreover, emission trading with other countries outside EU should be limited so as to keep emission quota prices high. However, the policy of spurring R&D by setting high emission taxes today is not suggested by the literature on climate change and R&D. In this paper we investigate this result further by modeling innovation activity explicitly. In our model both the amount of R&D and the amount of CO2 abatement are decided in a decentralized way by the market as a response to an emission tax. Moreover, we introduce three distinct failures in the market for new innovations; monopolistic pricing behavior, insufficient patent protection and dynamic knowledge spillovers. Our findings suggest that governments should under some circumstances set a higher carbon tax today if we have technological change driven by R&D than if we have pure exogenous technological change. Based on numerical simulations these circumstances are i) "a standing on shoulders" type of externality in R&D or ii) weak patent protection.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 548.

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Date of creation: Jun 2008
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Handle: RePEc:ssb:dispap:548

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Keywords: Climate policy; technological change; emission tax;

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References

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  1. Timo Goeschl & Grischa Perino, 2006. "Innovation Without Magic Bullets: Stock Pollution and R&D Sequences," Working Papers 0436, University of Heidelberg, Department of Economics, revised Dec 2006.
  2. Gerlagh, Reyer & Lise, Wietze, 2005. "Carbon taxes: A drop in the ocean, or a drop that erodes the stone? The effect of carbon taxes on technological change," Ecological Economics, Elsevier, vol. 54(2-3), pages 241-260, August.
  3. John C. Williams & Charles I. Jones, 1995. "Too much of a good thing? The economics of investment in R&D," Finance and Economics Discussion Series 95-39, Board of Governors of the Federal Reserve System (U.S.).
  4. Rosendahl, Knut Einar, 2004. "Cost-effective environmental policy: implications of induced technological change," Journal of Environmental Economics and Management, Elsevier, vol. 48(3), pages 1099-1121, November.
  5. Nordhaus, William, 1982. "How Fast Should We Graze the Global Commons?," American Economic Review, American Economic Association, vol. 72(2), pages 242-46, May.
  6. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  7. Farzin, Y H & Tahvonen, O, 1996. "Global Carbon Cycle and the Optimal Time Path of a Carbon Tax," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 515-36, October.
  8. Buonanno, Paolo & Carraro, Carlo & Galeotti, Marzio, 2003. "Endogenous induced technical change and the costs of Kyoto," Resource and Energy Economics, Elsevier, vol. 25(1), pages 11-34, February.
  9. 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.
  10. Grubler, Arnulf & Messner, Sabine, 1998. "Technological change and the timing of mitigation measures," Energy Economics, Elsevier, vol. 20(5-6), pages 495-512, December.
  11. 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.
  12. Reyer Gerlagh & Snorre Kverndokk & Knut Einar Rosendah, 2008. "Linking Environmental and Innovation Policy," Working Papers 2008.53, Fondazione Eni Enrico Mattei.
  13. Popp, David, 2006. "Innovation in climate policy models: Implementing lessons from the economics of R&D," Energy Economics, Elsevier, vol. 28(5-6), pages 596-609, November.
  14. 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.
  15. 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.
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Cited by:
  1. David Popp & Richard G. Newell & Adam B. Jaffe, 2009. "Energy, the Environment, and Technological Change," NBER Working Papers 14832, National Bureau of Economic Research, Inc.
  2. Reyer Gerlagh & Snorre Kverndokk & Knut Einar Rosendah, 2008. "Linking Environmental and Innovation Policy," Working Papers 2008.53, Fondazione Eni Enrico Mattei.
  3. Reyer Gerlagh & Snorre Kverndokk & Knut Rosendahl, 2009. "Optimal Timing of Climate Change Policy: Interaction Between Carbon Taxes and Innovation Externalities," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 43(3), pages 369-390, July.
  4. Benjamin Jones & Michael Keen & Jon Strand, 2013. "Fiscal implications of climate change," International Tax and Public Finance, Springer, vol. 20(1), pages 29-70, February.
  5. Rolf Golombek & Mads Greaker & Michael Hoel, 2010. "Climate Policy without Commitment," CESifo Working Paper Series 2909, CESifo Group Munich.

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