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On backstops and boomerangs: Environmental R&D under technological uncertainty

  • Goeschl, Timo
  • Perino, Grischa

In areas such as climate change, the recent economic literature has been emphasizing and addressing the pervasive presence of uncertainty. This paper considers a new and salient form of uncertainty, namely uncertainty regarding the environmental characteristics of 'green' innovations. Here, R&D may generate both backstop technologies and technologies that turn out to involve a new pollution problem ('boomerangs'). In the optimum, R&D will therefore typically be undertaken more than once. Extending results from multi-stage optimal control theory, we present a tractable model with a full characterization of the optimal pollution and R&D policies and the role of uncertainty. In this setting, (i) the optimal R&D program is defined by a research trigger condition in which the decision-maker's belief about the probability of finding a backstop enters in an intuitive way; (ii) a decreasing probability of finding a backstop leads to the toleration of higher pollution levels, slower R&D, a slower turnover of technologies, and an ambiguous effect on the expected number of innovations; (iii) learning about the probability of a backstop is driven by failures only and leads to decreasing research incentives; and (iv) small to moderate delays in the resolution of technological uncertainty do not affect the optimal policy.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 31 (2009)
Issue (Month): 5 (September)
Pages: 800-809

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Handle: RePEc:eee:eneeco:v:31:y:2009:i:5:p:800-809
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  1. Fischer, Carolyn & Toman, Michael & Withagen, Cees, 2002. "Optimal Investment in Clean Production Capacity," Discussion Papers dp-02-38, Resources For the Future.
  2. Marc Baudry, 2000. "Joint Management of Emission Abatement and Technological Innovation for Stock Externalities," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(2), pages 161-183, June.
  3. Heal, Geoffrey M., 1993. "The optimal use of exhaustible resources," Handbook of Natural Resource and Energy Economics, in: A. V. Kneeseā€  & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 18, pages 855-880 Elsevier.
  4. Just, Richard E. & Netanyahu, Sinaia & Olson, Lars J., 2005. "Depletion of natural resources, technological uncertainty, and the adoption of technological substitutes," Resource and Energy Economics, Elsevier, vol. 27(2), pages 91-108, June.
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