Working Paper: NBER ID: w10880
Authors: David Popp
Abstract: Because of the long-term nature of the climate problem, technological advances are often seen as an important component of any solution. However, when considering the potential for technology to help solve the climate problem, two market failures exist which lead to underinvestment in climate-friendly R&D: environmental externalities and the public goods nature of new knowledge. As a result, government subsidies to climate-friendly R&D projects are often proposed as part of a policy solution. Using the ENTICE model, I analyze the effectiveness of such subsidies, both with and without other climate policies, such as a carbon tax. While R&D subsidies do lead to significant increases in climate-friendly R&D, this R&D has little impact on the climate itself. Subsidies address the problem of knowledge as a public good, but they do not address the environmental externality, and thus offer no additional incentive to adopt new technologies. Moreover, high opportunity costs to R&D limit the potential role that subsidies can play. While R&D subsidies can improve efficiency, policies that directly affect the environmental externality have a much larger impact on both atmospheric temperature and economic welfare.
Keywords: R&D subsidies; climate policy; carbon tax; market failures; environmental externalities
JEL Codes: O33; O38; O41; Q42; Q43; Q55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| R&D subsidies (O38) | climate-friendly R&D (Q55) |
| R&D subsidies (O38) | public good nature of knowledge (H41) |
| R&D subsidies + carbon taxes (H23) | enhanced effects of carbon taxes (H23) |
| carbon taxes (H23) | atmospheric temperature (Q54) |
| carbon taxes (H23) | economic welfare (D69) |
| R&D subsidies (O38) | opportunity costs associated with R&D (O39) |
| R&D subsidies + stringent emissions regulations (O38) | significant climate benefits (Q54) |