Carbon Abatement Policies and Technological InnovationEPA Grant Number: R826153
Title: Carbon Abatement Policies and Technological Innovation
Investigators: Parry, Ian , Toman, Michael A.
Current Investigators: Parry, Ian , Fischer, Carolyn , Pizer, Billy
Institution: Resources for the Future
EPA Project Officer: Lee, Sonja
Project Period: October 1, 1997 through September 30, 2000
Project Amount: $240,000
RFA: Exploratory Research - Social Science (1997) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
Description:This project will analyze a variety of policy issues raised by the dynamic interaction between technological innovation and reductions in carbon emissions. In particular, we will assess the cumulative costs of carbon abatement policies, taking into account their impact on technological innovation, and the costs of R&D activity. Other questions to be addressed include whether is it optimal to conduct a lot of R&D into cleaner technologies now, or to smooth R&D activity out over time. Whether emissions reductions should be delayed until future technological innovation has significantly reduced the instantaneous cost of emissions abatement. Why emissions taxes and tradeable emissions permits differ in their effectiveness at stimulating technological innovation, and how empirically important these differences are. How inefficiencies in the patent system affect the incentives for R&D into cleaner technologies and how they affect the optimal quantity of carbon permits, or optimal level of carbon tax, over time.
The analysis will be developed in three stages. First, the optimal trajectories for the level of instantaneous carbon emissions abatement, and the optimal investment in ?environmental? R&D, will be characterized over future periods using a social planning model. Second, we will examine the effects of tradeable carbon permits and carbon taxes in a decentralized version of the model and their interplay with induced innovation. At this stage we will ignore imperfections in the patent system. The costs of achieving particular objectives for future emissions reductions under carbon taxes and tradeable carbon permits will be compared. Third, the analysis will be extended to incorporate a model of competition for patents for carbon-reducing technologies. This introduces various imperfections, such as the suboptimal diffusion of new technologies due to the monopoly power created by patents, and problems caused by imitation around patented technologies.
At each stage of the analysis we will begin with analytical models to establish qualitative results. In addition, quantitative results will be obtained by calibrating the models to existing estimates of the cost of emissions abatement, and assuming different scenarios for the effect of R&D on reducing economy-wide carbon emissions. To obtain analytical solutions to the model will require using quadratic functional forms. These models will be extended to allow for more general functional forms, and solved either by taking analytical approximations or by numerical simulation techniques. Throughout the project, we aim to provide highly intuitive qualitative and empirical analysis from relatively straightforward models, rather than detailed computational analysis.
The proposed research will improve our understanding of how technological innovation may affect the cumulative cost of future policies to reduce U.S. carbon emissions. Many of the insights will be of relevance to the regulation of other pollutants.