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Climate change and optimal energy technology R&D policy

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  • Baker, Erin
  • Solak, Senay

Abstract

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.

Suggested Citation

  • Baker, Erin & Solak, Senay, 2011. "Climate change and optimal energy technology R&D policy," European Journal of Operational Research, Elsevier, vol. 213(2), pages 442-454, September.
    • Handle: RePEc:eee:ejores:v:213:y:2011:i:2:p:442-454
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