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Climate change and optimal energy technology R&D policy

  • Baker, Erin
  • Solak, Senay
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    Public policy response to global climate change presents a classic problem of decision making under uncertainty. Theoretical work has shown that explicitly accounting for uncertainty and learning in climate change can have a large impact on optimal policy, especially technology policy. However, theory also shows that the specific impacts of uncertainty are ambiguous. In this paper, we provide a framework that combines economics and decision analysis to implement probabilistic data on energy technology research and development (R&D) policy in response to global climate change. We find that, given a budget constraint, the composition of the optimal R&D portfolio is highly diversified and robust to risk in climate damages. The overall optimal investment into technical change, however, does depend (in a non-monotonic way) on the risk in climate damages. Finally, we show that in order to properly value R&D, abatement must be included as a recourse decision.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221711003080
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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 213 (2011)
    Issue (Month): 2 (September)
    Pages: 442-454

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    Handle: RePEc:eee:ejores:v:213:y:2011:i:2:p:442-454
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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    1. Baker, Erin & Adu-Bonnah, Kwame, 2008. "Investment in risky R&D programs in the face of climate uncertainty," Energy Economics, Elsevier, vol. 30(2), pages 465-486, March.
    2. Blanford, Geoffrey J., 2009. "R&D investment strategy for climate change," Energy Economics, Elsevier, vol. 31(Supplemen), pages S27-S36.
    3. Pizer, William A. & Popp, David, 2008. "Endogenizing technological change: Matching empirical evidence to modeling needs," Energy Economics, Elsevier, vol. 30(6), pages 2754-2770, November.
    4. 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.
    5. Farzin, Y H & Kort, P M, 2000. " Pollution Abatement Investment When Environmental Regulation Is Uncertain," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(2), pages 183-212.
    6. Valentina Bosetti & Laurent Drouet, 2005. "Accounting for Uncertainty Affecting Technical Change in an Economic-Climate Model," Working Papers 2005.147, Fondazione Eni Enrico Mattei.
    7. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    8. Sue Wing, Ian, 2006. "Representing induced technological change in models for climate policy analysis," Energy Economics, Elsevier, vol. 28(5-6), pages 539-562, November.
    9. Baker, Erin & Chon, Haewon & Keisler, Jeffrey, 2009. "Advanced solar R&D: Combining economic analysis with expert elicitations to inform climate policy," Energy Economics, Elsevier, vol. 31(Supplemen), pages S37-S49.
    10. Ronald A. Howard, 1988. "Decision Analysis: Practice and Promise," Management Science, INFORMS, vol. 34(6), pages 679-695, June.
    11. Baker, Erin & Shittu, Ekundayo, 2008. "Uncertainty and endogenous technical change in climate policy models," Energy Economics, Elsevier, vol. 30(6), pages 2817-2828, November.
    12. Timo Goeschl & Grischa Perino, 2007. "On Backstops and Boomerangs: Environmental R&D under Technological Uncertainty," Working Papers 0437, University of Heidelberg, Department of Economics, revised Jan 2007.
    13. repec:spr:compst:v:58:y:2003:i:1:p:57-68 is not listed on IDEAS
    14. Popp, David, 2006. "ENTICE-BR: The effects of backstop technology R&D on climate policy models," Energy Economics, Elsevier, vol. 28(2), pages 188-222, March.
    15. repec:ner:tilbur:urn:nbn:nl:ui:12-84064 is not listed on IDEAS
    16. Baker, Erin & Shittu, Ekundayo, 2006. "Profit-maximizing R&D in response to a random carbon tax," Resource and Energy Economics, Elsevier, vol. 28(2), pages 160-180, May.
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