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Uncertain R&D, Backstop Technology and Ghgs Stabilization

Energy Economics, Vol. 31, No. 1, pp. S18-S26, 2009

FEEM Working Paper No. 6.2007

CMCC Research Paper No. 6

23 Pages Posted: 6 Feb 2007 Last revised: 24 Apr 2012

Valentina Bosetti

Fondazione Eni Enrico Mattei (FEEM); Bocconi University; CMCC - Euro Mediterranean Centre for Climate Change

Massimo Tavoni

Fondazione Eni Enrico Mattei (FEEM); Princeton University - Princeton Environmental Institute

Date Written: February 1, 2007

Abstract

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

Bosetti, Valentina and Tavoni, Massimo, Uncertain R&D, Backstop Technology and Ghgs Stabilization (February 1, 2007). Energy Economics, Vol. 31, No. 1, pp. S18-S26, 2009; FEEM Working Paper No. 6.2007; CMCC Research Paper No. 6. Available at SSRN: https://ssrn.com/abstract=960722

Valentina Bosetti (Contact Author)

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

Bocconi University ( email )

Via Gobbi 5
Milan, 20136
Italy

CMCC - Euro Mediterranean Centre for Climate Change

Viale Gallipoli, 49
Lecce, 73100
Italy

Massimo Tavoni

Fondazione Eni Enrico Mattei (FEEM) ( email )

Corso Magenta 63
20123 Milan
Italy

Princeton University - Princeton Environmental Institute

22 Chambers Street
Princeton, NJ 08544
United States

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