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Climate Policy and Innovation: A Quantitative Macroeconomic Analysis

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  • Stephie Fried

Abstract

A carbon tax can induce innovation in green technologies. I evaluate the quantitative impact of this channel in a dynamic, general equilibrium model with endogenous innovation in fossil, green, and nonenergy inputs. I discipline the parameters using evidence from historical oil shocks, after which both energy prices and energy innovation increased substantially. I find that a carbon tax induces large changes in innovation. This innovation response increases the effectiveness of the policy at reducing emissions, resulting in a 19.2 percent decrease in the size of the carbon tax required to reduce emissions by 30 percent in 20 years.

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  • Stephie Fried, 2018. "Climate Policy and Innovation: A Quantitative Macroeconomic Analysis," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(1), pages 90-118, January.
    • Handle: RePEc:aea:aejmac:v:10:y:2018:i:1:p:90-118
    Note: DOI: 10.1257/mac.20150289
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