Optimal timing of climate change policy

Interaction between carbon taxes and innovation externalities

R. Gerlagh, S. Kverndokk, K.E. Rosendahl

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Abstract

This paper addresses the impact of endogenous technology through research and development (R&D) on the timing of climate change policy. We develop a model with a stock pollutant (carbon dioxide) and abatement technological change through R&D, and we use the model to study the interaction between carbon taxes and innovation externalities. Our analysis shows that the timing of optimal emission reduction policy strongly depends on the set of policy instruments available. When climate-specific R&D targeting instruments are available, policy has to use these to step up early innovation. When these instruments are not available, policy has to steer innovation through creating demand for emission saving technologies. That is, carbon taxes should be high compared to the Pigouvian levels when the abatement industry is developing. Finally, we calibrate the model in order to explore the magnitude of the theoretical findings within the context of climate change policy.
Original languageEnglish
Pages (from-to)369-390
JournalEnvironmental and Resource Economics
Volume43
Issue number3
Publication statusPublished - 2009

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pollution tax
Taxation
Climate change
innovation
Innovation
climate change
Carbon
Carbon dioxide
technological change
research and development
targeting
carbon dioxide
externality
policy
Climate change policy
Externalities
Optimal timing
Interaction
Carbon tax
Industry

Cite this

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title = "Optimal timing of climate change policy: Interaction between carbon taxes and innovation externalities",
abstract = "This paper addresses the impact of endogenous technology through research and development (R&D) on the timing of climate change policy. We develop a model with a stock pollutant (carbon dioxide) and abatement technological change through R&D, and we use the model to study the interaction between carbon taxes and innovation externalities. Our analysis shows that the timing of optimal emission reduction policy strongly depends on the set of policy instruments available. When climate-specific R&D targeting instruments are available, policy has to use these to step up early innovation. When these instruments are not available, policy has to steer innovation through creating demand for emission saving technologies. That is, carbon taxes should be high compared to the Pigouvian levels when the abatement industry is developing. Finally, we calibrate the model in order to explore the magnitude of the theoretical findings within the context of climate change policy.",
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Optimal timing of climate change policy : Interaction between carbon taxes and innovation externalities. / Gerlagh, R.; Kverndokk, S.; Rosendahl, K.E.

In: Environmental and Resource Economics, Vol. 43, No. 3, 2009, p. 369-390.

Research output: Contribution to journalArticleScientificpeer-review

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