THE ECONOMICS OF CHANGING COURSE - IMPLICATIONS OF ADAPTABILITY AND INERTIA FOR OPTIMAL CLIMATE POLICY

This paper reviews evidence that energy technologies and systems adapt over time to accommodate external pressures: that technical innovatio n and systemic change in the energy sector is largely induced by need, and restrained by potentially large transitional costs, A simple inte grated model of optimal greenhouse gas abatement over time is presente d, in which the abatement cost depends on both fixed and transitional elements, It is shown that the optimal current response and long-run p rospects differ radically between the classical economic case- in whic h the cost of a given cutback in emissions is fixed exogenously - and the adaptive case- in which the response is ultimately adaptive but he avily constrained by inertia (ie low fixed but high transitional cost) , If energy systems are indeed to a large degree adaptive, the results demonstrate that as compared with the classical non-adaptive case: lo ng-run stabilization of atmospheric CO, may be optimal even with moder ate damages from climate change; greater near-term abatement efforts a re justified; and the cost of a given delay in response may be several times higher, Neglect of the issue of induced technical change and ot her adaptive responses may invalidate the policy implications drawn fr om most integrated assessment models developed to date.