Recent attempts to endogenize technology in climate policy models have produced mixed results. Models finding large gains from induced technological change (ITC) consider alternative energy technologies, but assume learning-by-doing, which ignores the opportunity costs of technological change. Models representing ITC through R&D spending consider opportunity costs, but typically include only a single representative energy technology. I address these shortcomings by including policy-induced energy R&D in a model with a backstop energy technology. While ITC is important, larger welfare gains come from simply adding an alternative technology to the model, as opportunity costs limit the role ITC can play. Moreover, since the backstop technology improves welfare even without climate policy, accurate policy analysis depends on a carefully constructed baseline simulation.
- Climate change
- Endogenous technological change
- Induced innovation
ASJC Scopus subject areas
- Economics and Econometrics