Uncertain R&D, Backstop Technology and Ghgs Stabilization
Energy Economics, Vol. 31, No. 1, pp. S18-S26, 2009
23 Pages Posted: 6 Feb 2007 Last revised: 24 Apr 2012
Date Written: February 1, 2007
This paper analyses optimal investments in innovation when dealing with a stringent climate target and with the uncertain effectiveness of R&D. The innovation needed to achieve the deep cut in emissions is modelled by a backstop carbon-free technology whose cost depends on R&D investments. To better represent the process of technological progress, we assume that R&D effectiveness is uncertain. By means of a simple analytical model, we show how accounting for the uncertainty that characterizes technological advancement yields higher investments in innovation and lower policy costs. We then confirm the results via a numerical analysis performed with a stochastic version of WITCH, an energy-economy-climate model. The results stress the importance of a correct specification of the technological change process in economy-climate models.
Keywords: Climate Change, Information and Uncertainty, Environmental Policy, Optimal R&D Investments
JEL Classification: O32, Q54, Q55
Suggested Citation: Suggested Citation