Induced technological change and the attractiveness of CO2 abatement policies

This paper investigates the significance of induced technological change (I TC) for the attractiveness of CO2 abatement policies. We use analytical and numerical general equilibrium models in which technological change results from profit-maximizing investments in R&D, We show that carbon abatement p olicies have very different impacts on R&D across industries, and do not ne cessarily raise the economy-wide rate of technological progress. Focusing o nly on the sectors with positive R&D impacts can lead to substantial undera ssessment of the GDP costs of CO2 abatement policies. The presence of ITC i mplies lower costs of achieving a given abatement target, but it implies hi gher gross costs (costs before netting out environment-related benefits) of a given carbon tax. Gross costs depend importantly on the efficiency of R& D markets prior to the introduction of CO2 policies. (C) 1999 Elsevier Scie nce B.V. All rights reserved.