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Directed Technical Change and Climate Policy

  • Vincent M. Otto

    (Wageningen University and MIT)

  • Andreas Löschel

    (European Commission)

  • John Reilly

    (Joint Program on the Science and Policy of Global Change)

This paper studies the cost effectiveness of climate policy if there are technology externalities. For this purpose, we develop a forward-looking CGE model that captures empirical links between CO2 emissions associated with energy use, directed technical change and the economy. We find the cost-effective climate policy to include a combination of R&D subsidies and CO2 emission constraints, although R&D subsidies raise the shadow value of the CO2 constraint (i.e. CO2 price) because of a strong rebound effect from stimulating innovation. Furthermore, we find that CO2 constraints differentiated toward CO2-intensive sectors are more cost effective than constraints that generate uniform CO2 prices among sectors. Differentiated CO2 prices, through technical change and concomitant technology externalities, encourage growth in the non-CO2 intensive sectors and discourage growth in CO2-intensive sectors. Thus, it is cost effective to let the latter bear relatively more of the abatement burden. This result is robust to whether emission constraints, R&D subsidies or combinations of both are used to reduce CO2 emissions.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2006.81.

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Date of creation: Jun 2006
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Handle: RePEc:fem:femwpa:2006.81
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