Uncertain R&D, Backstop Technology and Ghgs Stabilization
Fondazione Eni Enrico Mattei (FEEM); Bocconi University; CMCC - Euro Mediterranean Centre for Climate Change
Fondazione Eni Enrico Mattei (FEEM); Princeton University - Princeton Environmental Institute
February 1, 2007
Energy Economics, Vol. 31, No. 1, pp. S18-S26, 2009
FEEM Working Paper No. 6.2007
CMCC Research Paper No. 6
This paper analyses optimal investments in innovation when dealing with a stringent climate target and with the uncertain effectiveness of R&D. The innovation needed to achieve the deep cut in emissions is modelled by a backstop carbon-free technology whose cost depends on R&D investments. To better represent the process of technological progress, we assume that R&D effectiveness is uncertain. By means of a simple analytical model, we show how accounting for the uncertainty that characterizes technological advancement yields higher investments in innovation and lower policy costs. We then confirm the results via a numerical analysis performed with a stochastic version of WITCH, an energy-economy-climate model. The results stress the importance of a correct specification of the technological change process in economy-climate models.
Number of Pages in PDF File: 23
Keywords: Climate Change, Information and Uncertainty, Environmental Policy, Optimal R&D Investments
JEL Classification: O32, Q54, Q55
Date posted: February 6, 2007 ; Last revised: April 24, 2012
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