Climate Policies and Induced
Technological Change:
The Impacts of Timing of Technology
Subsidies
by
Snorre Kverndokk
Knut Einar Rosendahl
Thomas F. Rutherford
Presentation at Samstemt workshop November 20 2003
Knut Einar Rosendahl, Research Department, Statistics Norway
Introduction
• Technological development
– is crucial to reach long-term climate goals
– is not autonomous, but partly induced by market
incentives and policy measures
– is characterised by market failures (spillovers)
• Optimal climate policy
– may involve both carrot (subsidies) and stick (taxes)
– has an important time dimension
– requires lots of information, e.g. about the future
• Suboptimal climate policy
– what are the costs compared to optimal policy?
2
• Carbon-free energy technologies
– Today:
 Various costly, inflexible technologies
– Future:
 ??
 Learning/deployment potential for existing technologies
 Development of new technologies
 Lock-in of suboptimal technologies?
– Future development is partly induced
 How does carbon taxes and/or technology subsidies
affect the future development of carbon-free
technologies?
 What is the optimal climate policy, and what are the
consequences of simpler policy rules?
3
Stylised equilibrium model
• Intertemporal welfare optimisation with
representative consumer
– consumes energy and other goods
– climate restriction only affects energy production
• 3 energy technologies (perfect substitutes)
– Defender (DEF): Fossil fuel based energy technology.
No LBD.
– Challenger (CHL): Existing carbon-free energy
technology. High costs. LBD.
– Advanced (ADV): Future carbon-free energy
technology – available in 2050. Low costs. LBD.
4
• Learning by doing (LBD)
– Production of carbon-free energy gives experience,
and reduces unit costs
– LBD is assumed to be external to the firm (i.e.,
spillovers)
• Technology constraints
– Expansion and contraction constraints prevent too
rapid changes in the energy mix (internalised)
• Climate restriction
– Constraint on cumulative carbon emissions until 2200
• Policy measures:
– Carbon taxes and subsidies on carbon-free energy
5
• Alternative scenarios are simulated:
– No governmental intervention (baseline)
– Optimal climate policy
– Suboptimal policy w.r.t. CHL (existing carbon-free
energy)
 constant subsidy rates over time (2000-2060)
 carbon tax optimally chosen
– Delayed carbon tax until 2020
6
Energy supply in baseline scenario
7
Energy supply with optimal abatement
8
Unit costs with optimal abatement
9
Subsidy rates on CHL in alternative scenarios
10
Energy price impacts in alternative scenarios
11
Economic costs of alternative scenarios
12
Conclusions
• Learning spillovers imply that a combination of
carbon taxes and subsidies is optimal
• Optimal subsidy rate varies significantly over
time
– highest initially
• Constant subsidy rate increases abatement
costs only slightly
– insignificant difference when subsidy rate is close to
average optimal rate
• Uncertainty about future technological
development crucial
– calls for more sensitivity analyses
– stochastic framework preferable
13