Induced technological change and the attractiveness of CO2 abatement policies

TLDR

The paper investigates the significance of induced technological change for the attractiveness of CO₂ abatement policies. The authors employ analytical and numerical general equilibrium models where technological change arises from profit‑maximizing R&D investment. The study finds that CO₂ abatement policies alter R&D incentives unevenly across sectors, often failing to boost overall technological progress, and while induced technological change can reduce target‑achievement costs, it raises gross costs—especially when pre‑policy R&D markets are inefficient—leading to underestimation of GDP costs if only positively affected sectors are considered.

Abstract

This paper investigates the significance of induced technological change (ITC) for the attractiveness of CO2 abatement policies. We use analytical and numerical general equilibrium models in which technological change results from profit-maximizing investments in R&D. We show that carbon abatement policies have very different impacts on R&D across industries, and do not necessarily raise the economy-wide rate of technological progress. Focusing only on the sectors with positive R&D impacts can lead to substantial underassessment of the GDP costs of CO2 abatement policies. The presence of ITC implies lower costs of achieving a given abatement target, but it implies higher gross costs (costs before netting out environment-related benefits) of a given carbon tax. Gross costs depend importantly on the efficiency of R&D markets prior to the introduction of CO2 policies.