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Optimal Timing of Climate Change Policy: Interaction Between Carbon Taxes and Innovation Externalities

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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1. Economics, School of Social Sciences, University of Manchester, Oxford Road, Manchester, M13 9PL, UK

   Reyer Gerlagh

2. Institute for Environmental Studies, Vrije Universiteit, Amsterdam, Netherlands

   Reyer Gerlagh

3. Ragnar Frisch Centre for Economic Research, Oslo, Norway

   Snorre Kverndokk

4. Research Department, Statistics Norway, Oslo, Norway

   Knut Einar Rosendahl

1. Reyer Gerlagh
2. Snorre Kverndokk
3. Knut Einar Rosendahl

Correspondence to Reyer Gerlagh.

Gerlagh, R., Kverndokk, S. & Rosendahl, K.E. Optimal Timing of Climate Change Policy: Interaction Between Carbon Taxes and Innovation Externalities. Environ Resource Econ 43, 369–390 (2009). https://doi.org/10.1007/s10640-009-9271-y

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• Received: 28 January 2009

• Accepted: 10 February 2009

• Published: 28 February 2009

• Issue Date: July 2009

• DOI: https://doi.org/10.1007/s10640-009-9271-y

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