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Diffusion of climate technologies in the presence of commitment problems

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  • Taran Fæhn
  • Elisabeth Thuestad Isaksen

    ()
    (Statistics Norway)

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    Abstract

    Publicly announced GHG mitigation targets and emissions pricing strategies by individual governments may suffer from inherent commitment problems. When emission prices are perceived as short-lived, socially cost-effective upfront investment in climate technologies may be hampered. This paper compares the social abatement cost of a uniform GHG pricing system with two policy options for overcoming such regulatory uncertainty: one with a state guarantee scheme whereby the regulatory risk is borne by the government and one which combines emissions pricing with subsidies for upfront climate technology investments. A technology-rich CGE model is applied that accounts for abatement both within and beyond existing technologies. Our findings suggest a tripling of abatement costs if domestic climate policies fail to stimulate investment in new technological solutions. Since the cost of funding investment subsidies is found to be small, the subsidy scheme performs almost as well as the guarantee scheme.

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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 768.

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    Date of creation: Jan 2014
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    Handle: RePEc:ssb:dispap:768

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    Related research

    Keywords: Abatement costs; Climate technologies; Credible commitment; Computable general equilibrium model; Technological change; Technological diffusion; Hybrid modelling;

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    1. Valentina Bosetti & Carlo Carraro & Marzio Galeotti & Emanuele Massetti & Massimo Tavoni, 2006. "WITCH. A World Induced Technical Change Hybrid Model," Working Papers 2006_46, Department of Economics, University of Venice "Ca' Foscari".
    2. Abrego, Lisandro & Perroni, Carlo, 1999. "Investment Subsidies and Time-Consistent Environmental Policy," The Warwick Economics Research Paper Series (TWERPS) 533, University of Warwick, Department of Economics.
    3. Conconi, Paola & Perroni, Carlo, 2006. "Do Credible Domestic Institutions Promote Credible International Agreements?," CEPR Discussion Papers 5762, C.E.P.R. Discussion Papers.
    4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    5. John A. "Skip" Laitner and Donald A. Hanson, 2006. "Modeling Detailed Energy-Efficiency Technologies and Technology Policies within a CGE Framework," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 151-170.
    6. Sav, G Thomas, 1984. "The Engineering Approach to Economic Production Functions Revisited: An Application to Solar Processes," Journal of Industrial Economics, Wiley Blackwell, vol. 33(1), pages 21-35, September.
    7. Montero, Juan Pablo, 2011. "A note on environmental policy and innovation when governments cannot commit," Energy Economics, Elsevier, vol. 33(S1), pages S13-S19.
    8. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August.
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