Working Paper: NBER ID: w9762
Authors: David Popp
Abstract: Despite growing empirical evidence of the link between environmental policy and innovation, most economic models of environmental policy treat technology as exogenous. For long-term problems such as climate change, this omission can be significant. In this paper, I modify the DICE model of climate change (Nordhaus 1994, Nordhaus and Boyer 2000) to allow for induced innovation in the energy sector. Ignoring induced technological change overstates the welfare costs of an optimal carbon tax policy by 8.3 percent. However, cost-savings, rather than increased environmental benefits, appear to drive the welfare gains, as the effect of induced innovation on emissions and mean global temperature is small. Sensitivity analysis shows that potential crowding out of other R&D and market failures in the R&D sector are the most important limiting factors to the potential of induced innovation. Differences in these key assumptions explain much of the variation in the findings of other similar models.
Keywords: No keywords provided
JEL Codes: O33; O41; Q43; Q48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Carbon taxes (H23) | Induced innovation (in energy efficiency) (O39) |
| Induced innovation (in energy efficiency) (O39) | Lower welfare costs (I38) |
| Induced innovation (O36) | Minimal effect on emissions and temperature (Q54) |