Economic modeling of directed technical change: the case of CO2 emission reduction

Abstract

The potential of technical change for cost-effective pollution abatement typically differs from technology to technology. It therefore is the aim of this thesis to study how policy instruments can direct technical change to those technologies with the greatest potential for cost-effective pollution abatement. In the light of the climate change problem, this thesis uses climate policy and concomitant reduction of carbon dioxide (CO2) emissions associated with energy use as a case study.A first part of the study deals with the determinants of directed technical change. 1 derive these determinants using an economic model analysis of directed technical change. A main finding is that the consumption side of the economy is important for the direction of technical change. In particular, the extent to which consumers can substitute between goods determines the direction. Technology externalities reinforce the existing direction of technical change. Further, I explore a frontier approach for empirical analysis of delayed feedback in technical change that is based on the literature of productive efficiency analysis. 1 illustrate this approach using aggregate production data of25 OECD countries for the years 1980 through 1997. I find evidence that the benefits of technical change accrue gradually over time, with the delayed response continuing up to eight years.A second part of the study deals with the possibilities of directed technical change and technology externalities for the design of climate policy. Applying the model analysis at the aggregate level of the current Dutch economy, I find that CO2 emission reduction becomes more cost effective if climate policy takes the form of a combination of traditional environmental policy and technology policy. Regardless of the particular policy instruments chosen, however, I find that technology externalities can justify differentiation of climate policy between non-CO2 intensive- and CO2-intensive sectors, such that the latter face a higher CO2 price. This result is considerably different from the conventional environmental economic conclusion that equal marginal abatement costs across the economy 1ead to a cost-effective emission reduction. Finally, focusing the model analysis more on the energy sector of the Dutch economy, I study cost effectiveness of combining the environmental policy with technology policy aimed at reducing the cost and speeding the adoption of a specific CO2 abatement technology, I take CO2 capture and storage in the Dutch electricity sector as a case study. I find that such a policy combination leads to faster adoption of CO2 capture and storage and improves cost effectiveness of the emission reduction