The Role of Environmental and Technology Policies in the Transition to a Low-Carbon Energy Industry

Abstract

In a dynamic general equilibrium model we study the interplay between gradual and structural change in the transition to a low-carbon energy industry. We focus on the welfare-theoretic consequences of diverging social and private rates of time preference and a time-to-build feature in capital accumulation. Both features are particularly important in the transformation of energy systems. We show that only a combination of environmental and technology policies can achieve a socially optimal transition. We thus provide a new reason for environmental regulation to be complemented by technology policy such as a non-distortionary investment subsidy.

Keywords: environmental and technology policy, social vs. individual rates of time preference, time to build, gradual vs. structural technological change, energy industry

JEL Classification: H23, Q48, H43