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Endogenous Technical Change and Climate Policy: Effects of Research and Development and a Stock of Knowledge in a General Equilibrium Framework

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  • Ramiro Parrado
  • Andreas Löschel
  • Sebastian Voigt

Abstract

The creation and accumulation of knowledge constitutes without any doubt one of the major drivers of progress and development. The incontrovertible evidence of that creative process is present everywhere in our daily routines and societies. However, it is rather difficult to define a measure of knowledge and then link it to economic development. Albeit the paradoxical fact that the empirical estimations of economic growth are based on a residual defined by Solow as the “measure of our ignorance”, the efforts to provide new methods and theories to explain economic development have produced many concepts and methodologies. One of them is the endogenous growth based on research and development (R&D) that contributes to build a stock of knowledge. Hence, there has been a growing concern to include those activities as part of national accounting. Within this context, many countries have started to produce R&D satellite accounts following defined rules and linking the Frascati manual (OECD, 2002) to the System of National Accounts. These efforts imply that detailed work has been carried out at the sectoral level within national accounts to identify and classify R&D expenditures following those linking guidelines. The data structured in the system of national accounts provides the basis for extensive analysis by allowing the construction of input-output databases and also social accounting matrices in which computable general equilibrium (CGE) models are based on. CGE models are a useful tool for policy analysis. They are also used in climate change assessments considering both potentially wide economic impacts of inaction as well as possible responses through different climate policy alternatives. In this context, the provision of R&D data constitutes a fundamental step to consider the implementation of endogenous technical change (ETC) in different modelling exercises. Moreover, considering explicitly ETC establishes a crucial issue in policy and impact assessments since the inclusion of feedback mechanisms allows a better understanding of direct and indirect effects. The objective of the paper is to include an ETC formulation on a CGE model in order to assess its contribution when considering a specific climate policy. According to a literature review, including a knowledge capital stock product of investments in R&D allows to provide an endogenous growth source along physical capital accumulation. Although there are some challenges regarding the integration of additional data related to R&D and the stock of knowledge, the corresponding benefit is the possibility to provide details about the interaction between sectors including spillovers from trade or R&D. Most of the general equilibrium framework literature with a focus on modelling R&D induced technical change is based on aggregated growth models (e.g. Smulders and de Nooij, 2003) or optimal growth models considering macro regions (e.g. Nordhaus, 2002; Buonanno et al. 2003, Popp, 2004, Carraro and Galeotti, 2004; and Bosetti et al. 2006a). There are fewer studies using multi sector CGE models taking into account knowledge stocks at the national level. For instance, while Goulder & Schneider (1999) estimate a stock of knowledge related to four aggregate industries of the US economy for 1995; Sue Wing (2003) and Otto et al. (2008) refine that approach by including knowledge stocks in a social accounting matrix (SAM) framework. Until now, the availability of reliable R&D data and the complexity of including it on a SAM have proven a challenge to provide a multi region and multi sector database with R&D stocks and flows. This paper builds upon the recent efforts to supply more consistent data on R&D and the previous experiences to model technical change. It adds to the literature by introducing an ETC specification in a global CGE model based on sector specific knowledge stocks. This allows analysing the different implications of selected policies, including trade, R&D, and technology transfers. Accordingly, the main contributions of this paper are: i) to produce a coherent and integrated database including region and sector specific flows and stocks of knowledge, based on a SAM structure, ii) to extend a multi-sector and multi country CGE model with a knowledge based endogenous technical change specification using the integrated database, and iii) to use the improved model for assessing the differences and implications of a carbon tax policy over a traditional autonomous (exogenous) technical change formulation. The modified ETC model shows more flexibility for regions than can accumulate more knowledge. Developed regions with significant initial knowledge stocks can better react to a carbon tax and even increase their GDP. Conversely, developing countries have a higher burden because of the carbon tax since their initial knowledge stocks are lower. Investments in R&D and knowledge stocks allow reducing a carbon tax burden in the future. At the world level, the model with ETC produces a higher cost of climate policies, but at the same time lower carbon intensities. Moreover, in the presence of a carbon tax, there are redistributive effects on R&D investments and knowledge accumulation. High carbon based fuels reduce their output while other industries increase their production. However, during the first years of the implementation of the carbon tax, there is evidence of a market size effect that increases R&D investments in sectors with a significant size such as the coal industry. When a carbon tax is imposed, the accumulation of knowledge is lower either when the capital-energy substitution is higher, or when elasticities of supply for fossil fuels are lower.

Suggested Citation

  • Ramiro Parrado & Andreas Löschel & Sebastian Voigt, 2012. "Endogenous Technical Change and Climate Policy: Effects of Research and Development and a Stock of Knowledge in a General Equilibrium Framework," EcoMod2012 4249, EcoMod.
  • Handle: RePEc:ekd:002672:4249
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    1. Lin, Weiming & Chen, Jianling & Zheng, Yi & Dai, Yongwu, 2019. "Effects of the EU Emission Trading Scheme on the international competitiveness of pulp-and-paper industry," Forest Policy and Economics, Elsevier, vol. 109(C).

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