Collaborative Research: Choosing a Portfolio of Technology Policies in an Uncertain World

University Of Wisconsin-Madison, Madison WI

Investigators

Abstract

Addressing climate change without damaging the economy will require substantial improvements to energy technologies. These improvements depend on investments in, and the production of, new knowledge -- both in the laboratory and in commercial use. Because knowledge, due to its special nature, is notoriously difficult for private firms to control and profit from exclusively, it is argued that government support is required to assure that opportunities are not squandered. The literature is clear that the presence of multiple market failures and multiple technical options means that good government policy needs to have a portfolio of policies addressing a portfolio of technologies. However, there are many possible diversified portfolios. This research applies science to science and innovation policy in order to estimate the consequences of combinations of technology policy instruments on the climate and on the economy. Intellectual Merit: This project aims to provide a framework for designing a portfolio of technology policies to address climate change. The researchers model the effects of combinations of policy instruments on a portfolio of technologies, when both the outcomes of the technology policies and the effects of climate change are uncertain. The project evaluates combinations of three policy instruments: government funded R&D; subsidies for demand; and carbon prices. It focuses on two important technologies: solar PV and Carbon Capture and Storage (CCS), while developing a framework amenable to the consideration of a larger set of technologies. Some of the key questions the project addresses are: - What factors are most important in choosing the best mix of R&D and subsidies? How does the mix change with increasing uncertainty in climate damages? - What drives the optimal mix of a two-technology portfolio? - To what extent do R&D and subsidies affect the optimal level of emissions abatement? - How large is the hedging value that subsidies provide? The researchers collect and use expert elicitations to estimate the probability of R&D investment producing technical improvements in CCS. Simultaneously and iteratively, they develop a bottom-up cost model to estimate the cost reductions expected from both economies of scale and learning-by-doing as deployment of CCS technology expands. They implement this model -- together with an earlier model of solar PV -- into an Integrated Assessment Model, allowing for the optimization of portfolios of policy instruments designed to reduce the cost of climate change mitigation. This configuration allows cost benefit optimization of policy choices under varying probability distributions over damages and technical outcomes. Broader Impact: Improved models that help improve the allocation of public funds could have an important fiscal impact. In addition, the research will inform the development of classes and train students in public policy model building.