Induced Technical Change in Energy and Environmental Modeling: Analytic Approaches and Policy Implications

TLDR

Technical change in the energy sector is central to addressing long‑term environmental issues, yet most E3 models assume it exogenously, a key weakness. The study classifies the main approaches to modeling induced technical change and reviews their results with a focus on climate change. The authors classify the main approaches to modeling induced technical change and review results, focusing on climate change. They find that induced technical change is largely driven by market conditions and environmental policies, that learning‑by‑doing models produce weak responses only when highly aggregated or equating rates of return across sectors, and that global diffusion of cleaner technologies can generate positive spillovers that offset negative substitution effects, potentially having a large impact.

Abstract

▪ Abstract Technical change in the energy sector is central for addressing long-term environmental issues, including climate change. Most models of energy, economy, and the environment (E3 models) use exogenous assumptions for this. This is an important weakness. We show that there is strong evidence that technical change in the energy sector is to an important degree induced by market circumstances and expectations and, by implication, by environmental policies such as CO 2 abatement. We classify the main approaches to modeling such induced technical change and review results with particular reference to climate change. Among models with learning by doing, weak responses are only obtained from models that are highly aggregated (lack technological diversity) and/or that equate rates of return to innovation across sectors. Induced technical change broadens the scope of efficient policies toward mitigation, including not just research and development and aggregated market instruments but a range of sectoral-based policies potentially at divergent marginal costs. Furthermore, to the extent that cleaner technologies induced by mitigation diffuse globally, a positive spillover will result that will tend to offset the substitution-based negative spillover usually hypothesized to result from the migration of polluting industries. Initial explorations suggest that this effect could also be very large.