Should We Give Up After Solyndra? Optimal Technology R&D Portfolios Under Uncertainty

55 Pages Posted: 4 Aug 2015

See all articles by Mort Webster

Mort Webster

Pennsylvania State University

Karen Fisher-Vanden

Pennsylvania State University

David Popp

Syracuse University - Department of Public Administration; National Bureau of Economic Research (NBER)

Nidhi Santen

Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA)

Multiple version iconThere are 2 versions of this paper

Date Written: July 31, 2015

Abstract

Global climate change and other environmental challenges require the development of new energy technologies with lower emissions. In the near-term, R&D investments, either by government or the private sector, can bring down the costs of these lower emission technologies. However, the results of R&D are uncertain, and there are many potential technologies that may turn out to play an effective role in the future energy mix. In this paper, we address the problem of allocating R&D across technologies under uncertainty. Specifically, given two technologies, one with lower costs at present, but the other with greater uncertainty in the returns to R&D, how should one allocate the R&D budget? We develop a multi-stage stochastic dynamic programming version of an integrated assessment model of climate and economy that represents endogenous technological change through R&D decisions for two substitutable non-carbon backstop technologies. Using the model, we demonstrate that near-term R&D into the higher cost technology is justified, and that the amount of R&D into the high cost technology increases with both the variance in the uncertainty in returns to R&D and with the skewness of the uncertainty. We also present an illustrative case study of wind and solar photovoltaic technologies, and show that poor R&D results in early periods do not necessarily mean that investment should not continue.

Keywords: O380, Q420, Q480, Q550

JEL Classification: innovation, climate change, solar energy, wind energy

Suggested Citation

Webster, Mort and Fisher-Vanden, Karen and Popp, David C. and Santen, Nidhi, Should We Give Up After Solyndra? Optimal Technology R&D Portfolios Under Uncertainty (July 31, 2015). CESifo Working Paper Series No. 5448, Available at SSRN: https://ssrn.com/abstract=2639083

Mort Webster

Pennsylvania State University ( email )

Karen Fisher-Vanden

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

David C. Popp (Contact Author)

Syracuse University - Department of Public Administration ( email )

Syracuse, NY
United States
315-443-2482 (Phone)
315-443-1075 (Fax)

HOME PAGE: http://faculty.maxwell.syr.edu/dcpopp/index.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nidhi Santen

Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ( email )

79 JFK Street
Cambridge, MA 02138
United States

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