Endogenous induced technical change and the costs of Kyoto

Many predictions and conclusions in the climate change literature have been made and drawn on the basis of theoretical analyses and quantitative models that are either static or that allow for simple forms of changes in technology, often along exogenously given time paths. It is therefore not clear a priori whether those conclusions and policy recipes still hold in the more realistic case of endogenously evolving technologies. In this paper, a quantitative tool with the features of an endogenous growth model is presented, which also accounts for the possibility that technical change can be induced by environmental policy measures. Both the output production technology and the emission-output ratio depend upon the stock of knowledge, which accumulates through R&D activities. R&D is thus an additional policy variable that comes into play along with pollution abatement and capital investment. Two versions of this climate model are studied, one with endogenous technical change but exogenous environmental technical change (i.e. no induced technical change) and the other with both endogenous and induced technical change. Hence, in both models technical change evolves endogenously as far as the production technology is concerned, but endogenous environmental (or induced) technical change is only accounted for in the second version. Finally, a third version of the model also captures technological spillover effects. As an application, the three versions of the model are simulated allowing for trade of pollution permits as specified in the Kyoto Protocol and assessing the implications in terms of cost efficiency, economic growth and R&D efforts of the three different specifications of technical change.