The Optimal Climate Policy Portfolio When Knowledge Spills Across Sectors

Abstract

This paper studies the implications for climate policy of the interactions between environmental and knowledge externalities. Using a numerical analysis performed with the hybrid integrated assessment model WITCH, extended to include mutual spillovers between the energy and the non-energy sector, we show that the combination between environmental and knowledge externalities provides a strong rationale for implementing a portfolio of policies for both emissions reduction and the internalisation of knowledge externalities. Moreover, we show that implementing technology policy as a substitute for stabilisation policy is likely to increase global emissions.

Keywords: technical change, climate change, development, innovation, spillovers

JEL Classification: C72, H23, Q25, Q28, O31, O41, Q54