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Climate Policies and Induced Technological Change: Which to Choose the Carrot or the Stick?

27 Pages Posted: 28 Feb 2002  

Snorre Kverndokk

Ragnar Frisch Centre for Economic Research

Knut Einar Rosendahl

Norwegian University of Life Sciences; Statistics Norway - Research Department

Thomas F. Rutherford

Centre for Energy Policy and Economics

Date Written: October 2001

Abstract

Policies to reduce emissions of greenhouse gases such as CO2 will affect the rate and pattern of technological change in alternative energy resources and other production processes. Imperfections in markets for non-polluting technologies imply that a decentralised economy does not deliver a socially optimal outcome, and this could justify policy interventions such as subsidies. This paper considers the welfare effects of technology subsidies as part of a carbon abatement policy package. We argue that the presence of spillovers in alternative energy technologies does not necessarily imply that subsidy policies are welfare improving. We illustrate this point in the context of a general equilibrium model with two forms of carbon-free energy, an existing "alternative energy" which is a substitute for carbon-based fuels, and "new vintage energy" which provides a carbon-free replacement for existing energy services. Subsidisation of alternative energy on the grounds of spillover effects can be welfare-worsening if it crowds-out new vintage technologies.

Keywords: Induced technological change; Climate change policies; Policy instruments; Computable general equilibrium models

JEL Classification: D58, H21, O30, Q42

Suggested Citation

Kverndokk, Snorre and Rosendahl, Knut Einar and Rutherford, Thomas F., Climate Policies and Induced Technological Change: Which to Choose the Carrot or the Stick? (October 2001). Available at SSRN: https://ssrn.com/abstract=302434 or http://dx.doi.org/10.2139/ssrn.302434

Snorre Kverndokk (Contact Author)

Ragnar Frisch Centre for Economic Research ( email )

Gaustadalleen 21
N-0349 Oslo
Norway
+47 22958811 (Phone)
+47 22958825 (Fax)

HOME PAGE: http://www.frisch.uio.no/cv/snorrek_eng.html

Knut Einar Rosendahl

Norwegian University of Life Sciences ( email )

PO Box 5033
NO-1432 Aas
Norway
+47 64966117 (Phone)

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway
+47 21094954 (Phone)
+47 21094963 (Fax)

Thomas F. Rutherford

Centre for Energy Policy and Economics ( email )

ETH-Zentrum
Zurich, CH-8092
United States
+41 (0)44/632 6359 (Phone)
+41 (0)44/632 1622 (Fax)

HOME PAGE: http://www.cepe.ethz.ch/

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