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Diffusion of Climate Technologies in the Presence of Commitment Problems

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Publicly announced greenhouse gas (GHG) mitigation targets and emissions pricing strategies by individual governments may suffer from inherent commitment problems. When emission prices are perceived as short-lived, socially cost-effective upfront investment in climate technologies may be hampered. This paper compares the social abatement cost of a uniform GHG pricing system with two policy options for overcoming such regulatory uncertainty: One combines the emissions pricing with a state guarantee scheme whereby the regulatory risk is borne by the government and one combines the system with subsidies for upfront climate technology investments. A technology-rich computable general equilibrium model is applied that accounts for abatement both within and beyond existing technologies. Our findings suggest a tripling of abatement costs if domestic climate policies fail to stimulate investment in new technological solutions. Since the cost of funding investment subsidies is found to be small, the subsidy scheme performs almost as well as the guarantee scheme.

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Energy Specializations: Renewables – Other ; Energy and the Environment – Policy and Regulation; Energy and the Environment – R&D and Emerging Technologies; Energy and the Environment – Environmental Market Design; Energy and the Environment – Carbon Capture and Sequestration; Energy and the Environment – Climate Change and Greenhouse Gases

JEL Codes: Q54: Climate; Natural Disasters and Their Management; Global Warming, Q52: Pollution Control Adoption and Costs; Distributional Effects; Employment Effects, Q42: Alternative Energy Sources, Q41: Energy: Demand and Supply; Prices, Q24: Renewable Resources and Conservation: Land, Q21: Renewable Resources and Conservation: Demand and Supply; Prices

Keywords: Abatement costs, Climate technologies, Credible commitment, Computable general equilibrium model, Hybrid modelling, Technological change, Technological diffusion

DOI: 10.5547/01956574.37.2.tfae

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Published in Volume 37, Number 2 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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