What is the Growth Potential of Green Innovation? An Assessment of EU Climate Policy Options

Abstract

This paper provides a model-based analysis of the cost-efficiency of different EU climate policy options that could direct innovation in the private sector towards an environmentally sustainable growth path. Our objective is to assess different policy options in order to identify an appropriate policy-mix of environmental and innovation market instruments in terms of their cost-effectiveness. For this purpose, we develop a fully-dynamic, multisectoral DSGE model with endogenous technological change where we specifically identify its environmental content and we calibrate the model for the EU and the rest of the world. Our results suggest that an appropriate policy mix should intensively stimulate R&D in the green sectors in the short-run and phase-it out by spreading the R&D support to all sectors of the economy in the medium-term. Although intuitive, the orders of magnitude presented in this paper should be interpreted with caution by taking into account the underlying assumptions of the model and identification of green innovation data.

Keywords: Carbon revenue recycling, climate change, directed technical change, double dividend, dynamic general equilibrium model, endogenous growth, green growth, innovation, R&D

JEL Classification: C63, H23, O30, O41