A New Perspective on Climate Policy
The Fondazione Eni Enrico Mattei series on Economics, the Environment and Sustainable Development
Edited by Valentina Bosetti, Carlo Carraro, Emanuele Massetti and Massimo Tavoni
Chapter 2: Shifting the Boundary: The Role of Innovation
It’s widely recognised that tackling climate change at bearable social costs will involve far-reaching technological changes, especially in the energy sector. Chapter 1 has shown that even moderate climate mitigation targets ask for a dramatic shift in the ways that energy is supplied and used.1 Greater energy efficiency and widespread deployment of low-carbon technologies are both needed. Chapter 1 has also shown that it is optimal to massively increase investments in innovation in order to boost energy efficiency and to decarbonise the energy sector. For this reason technical change has become one of the key dimensions of the economics of climate change and policy modelling. During the last decade the description of technical change in integrated models for climate policy has greatly improved (Gillingham et al., 2008; Carraro et al., 2010). Understanding and accurately characterising the process of technical change is a challenging task. Technical change responds to changes in economic incentives, or in policy regimes and regulations. Whereas the former process is referred to as endogenous technical change, the latter phenomenon is known as induced technical change (ITC). The majority of climate economy models show that induced technical change substantially changes the long-run costs of climate policy and the optimal timing of mitigation. Several integrated assessment models describe endogenous technical change in clean technologies, but most neglect innovation in other sectors. The effect of mitigation policies on the direction and the pace of technical change is therefore still a matter of debate. Some climate-economy models generate scenarios of research and development (R & D) spending or learning, but most cannot say if climate policy will increase of decrease economy-wide R & D investments. As a consequence, climate-economy models rarely represent knowledge externalities and examine the interplay between R & D and climate mitigation policies.
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