Endogenous Technological Change in the DICE Model of Global Warming

Syracuse University, Syracuse NY

Investigators

Abstract

When considering solutions to long-term environmental problems such as climate change, it is important to consider the role that technological change may play. Nonetheless, most economic models of climate change treat technology as exogenous. Since policies adopted to combat climate change are likely to have a large impact on the pace and direction of technological change, these models miss the important link between policy and innovation. The proposed project addresses this concern by making use of empirical results on technological change in the energy industry to incorporate endogenous technological change into the DICE model of climate change. To date, few models of climate change include endogenous technological change that affects carbon emissions. Although these models offer valuable contributions to the efforts of modeling endogenous technological change, they suffer from a lack of empirical estimates on the nature of technological change. Thus, the most important contribution of the proposed research is that it makes use of empirical studies of technological change in the energy sector to more accurately model technological change that may help ameliorate climate change. The proposed research will begin by modifying the DICE model of climate change to include endogenous technological change in a manner consistent with existing empirical studies. In addition, by making use of the DICE model, which explicitly models both the costs and benefits of greenhouse gas reduction, the proposed research aims to provide a better understanding of how consideration of endogenous technological change affects the optimal policy decision. One can imagine two offsetting effects. First, a higher carbon tax may be desired, because the tax leads to increased R&D, which lowers the cost of achieving a given level of abatement. Second, a lower carbon tax may be desired, because the innovation induced by a tax allows a given abatement target to be achieved more easily. The revised DICE model will be used to study which of these two effects dominates. Finally, the proposed research extends previous work of other researchers in this area by modeling the effect of research on a backstop technology on the extraction of an exhaustible supply of fossil fuels. In particular, the project asks whether policies that speed up technological advances in non-carbon backstop technologies also increase the rate at which the stock of fossil fuels is extracted.