Optimal CO2 abatement in the presence of induced technological change

This paper explores the significance of policy-induced technological change for the design of carbon-abatement policies. We derive analytical expressi ons characterizing optimal CO2 abatement and carbon tax profiles under diff erent specifications for the channels through which technological progress occurs. We consider both R&D-based and learning-by-doing-based knowledge ac cumulation, and we examine each specification under both a cost-effectivene ss and a benefit-cost policy criterion. We show analytically in a cost-effectiveness setting that the presence of i nduced technological change (ITC) always implies a lower time profile of op timal carbon taxes. The same is true in a benefit-cost setting as long as d amages are convex in the atmospheric CO2 concentration. The impact of ITC o n the optimal abatement path varies. When knowledge is gained through R&D i nvestments, the presence of ITC justifies shifting some abatement from the present to the future. However, when knowledge is accumulated via learning- by-doing the impact on the timing of abatement is analytically ambiguous. Illustrative numerical simulations indicate that the impact of ITC upon ove rall costs and optimal carbon taxes can be quite large in a cost-effectiven ess setting but typically is much smaller under a benefit-cost policy crite rion. The impact of FC on the timing of abatement is very slight, but the e ffect (applicable in the benefit-cost case) on cumulative abatement over ti me can be large, especially when knowledge is generated through learning-by doing. (C) 2000 Academic Press.