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R&D Subsidies and Climate Policy: Is There a "Free Lunch"?

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  • David Popp

Abstract

Because of the long-term nature of the climate problem, technological advances are often seen as an important component of any solution. However, when considering the potential for technology to help solve the climate problem, two market failures exist which lead to underinvestment in climate-friendly R&D: environmental externalities and the public goods nature of new knowledge. As a result, government subsidies to climate-friendly R&D projects are often proposed as part of a policy solution. Using the ENTICE model, I analyze the effectiveness of such subsidies, both with and without other climate policies, such as a carbon tax. While R&D subsidies do lead to significant increases in climate-friendly R&D, this R&D has little impact on the climate itself. Subsidies address the problem of knowledge as a public good, but they do not address the environmental externality, and thus offer no additional incentive to adopt new technologies. Moreover, high opportunity costs to R&D limit the potential role that subsidies can play. While R&D subsidies can improve efficiency, policies that directly affect the environmental externality have a much larger impact on both atmospheric temperature and economic welfare.

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  • David Popp, 2004. "R&D Subsidies and Climate Policy: Is There a "Free Lunch"?," NBER Working Papers 10880, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10880
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    Cited by:

    1. Eskeland, Gunnar S. & Mideksa, Torben K., 2008. "Transportation fuel use, technology and standards: The role of credibility and expectations," Policy Research Working Paper Series 4695, The World Bank.
    2. Brian Roach, "undated". "Policies for Funding a Response to Climate Change," GDAE Working Papers 08-03, GDAE, Tufts University.
    3. Sue Wing, Ian, 2006. "Representing induced technological change in models for climate policy analysis," Energy Economics, Elsevier, vol. 28(5-6), pages 539-562, November.
    4. Massimiliano Mazzanti & Roberto Zoboli, 2006. "Examining the Factors Influencing Environmental Innovations," Working Papers 2006.20, Fondazione Eni Enrico Mattei.
    5. Roach, Brian, 2008. "Policies for Funding a Response to Climate Change," Working Papers 179062, Tufts University, Global Development and Environment Institute.
    6. Mazzanti, Massimiliano & Zoboli, Roberto, 2007. "Environmental Efficiency, Emission Trends and Labour Productivity: Trade-Off or Joint Dynamics? Empirical Evidence Using NAMEA Panel Data," Climate Change Modelling and Policy Working Papers 9320, Fondazione Eni Enrico Mattei (FEEM).
    7. Tiantian Zhai, 2022. "Double-Faceted Environmental Civil Liability and the Separate-Regulatory Paradigm: An Inspiration for China," Sustainability, MDPI, vol. 14(7), pages 1-21, April.
    8. Brita Bye & Karl Jacobsen, 2009. "On general versus emission saving R&D support," Discussion Papers 584, Statistics Norway, Research Department.
    9. Hendrik Van den Berg, 2012. "Explaining neoclassical economists' pro-growth agenda: does the popular Solow growth model bias economic analysis?," International Journal of Pluralism and Economics Education, Inderscience Enterprises Ltd, vol. 3(1), pages 40-62.
    10. Alberto Quadrio Curzio & Fausta Pellizzari & Roberto Zoboli, 2011. "Resources and Technologies," CRANEC - Working Papers del Centro di Ricerche in Analisi economica e sviluppo economico internazionale crn1101, Università Cattolica del Sacro Cuore, Centro di Ricerche in Analisi economica e sviluppo economico internazionale (CRANEC).
    11. Marzio Galeotti & Carlo Carraro, 2004. "Does Endogenous Technical Change Make a Difference in Climate Policy Analysis? A Robustness Exercise with the FEEM-RICE Model," Working Papers 2004.152, Fondazione Eni Enrico Mattei.

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    More about this item

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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