The International Yearbook of Environmental and Resource Economics 2004/2005

The International Yearbook of Environmental and Resource Economics 2004/2005

A Survey of Current Issues

New Horizons in Environmental Economics series

Edited by Tom Tietenberg and Henk Folmer

This major annual publication provides a state-of-the-art survey of contemporary research on environmental and resource economics by some of the leading experts in the field.

Chapter 2: Environmental policy, induced technological change and economic growth: a selective review

Wolfgang K. Heidug and Regina Bertram

Subjects: economics and finance, environmental economics, environment, environmental economics

Extract

Wolfgang K. Heidug and Regina Bertram 1. INTRODUCTION Technological change has long appeared to play a backstage role in economic thinking. Its impact was typically described in terms of variables that change exogenously with the progress of time. It is only with the advent of the new growth theory (reviewed in the monographs by Barro and Sala-i-Martin, 1995, and Aghion and Howitt, 1999), in which technological change is endogenously determined, that issues of technological change have become a focus of economic research. Specifically, the important role of environmental policy for inducing technological progress through creating constraints and incentives has been increasingly recognized. The discussion concerning the optimal time path of carbon taxes in the presence of induced technical change illustrates this. Wigley et al. (1996) argue for a policy that makes postponement of abatement attractive in order to optimally exploit the reduction of abatement cost resulting from technological progress. However, work by Grubb et al. (1996) indicates that a policy that favors more abatement in the short term is superior to a ‘wait-and-see’ approach when technological progress advances through learning-by-doing. This chapter reviews the relation between environmental policy, the technological change that it induces and the resulting consequences for economic growth. Through its inclusion of growth aspects it complements an earlier review by Jaffe et al. (2002) and the reviews by Clarke and Weyant (2002) and Grubb et al. (2002), which focus on climate change and energy policy. The review is selective in that it does not attempt to mirror...

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