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Diffusion of Climate Technologies in the Presence of Commitment Problems

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  • Taran Faehn and Elisabeth T. Isaksen

Abstract

Publicly announced greenhouse gas (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 combines the emissions pricing with a state guarantee scheme whereby the regulatory risk is borne by the government and one combines the system with subsidies for upfront climate technology investments. A technology-rich computable general equilibrium 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.

Suggested Citation

  • Taran Faehn and Elisabeth T. Isaksen, 2016. "Diffusion of Climate Technologies in the Presence of Commitment Problems," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
  • Handle: RePEc:aen:journl:ej37-2-faehn
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    Cited by:

    1. repec:eee:energy:v:143:y:2018:i:c:p:191-201 is not listed on IDEAS
    2. Taran Fæhn, Cathrine Hagem, Lars Lindholt, Ståle Mæland, and Knut Einar Rosendahl, 2017. "Climate policies in a fossil fuel producing country demand versus supply side policies," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    3. repec:eee:energy:v:134:y:2017:i:c:p:984-990 is not listed on IDEAS
    4. Karoline S. Rogge & Elisabeth Dütschke, 2017. "Exploring Perceptions of the Credibility of Policy Mixes: The Case of German Manufacturers of Renewable Power Generation Technologies," SPRU Working Paper Series 2017-23, SPRU - Science and Technology Policy Research, University of Sussex.

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    JEL classification:

    • F0 - International Economics - - General

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