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Environmental Policy in the Presence of Induced Technological Change

Author

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  • Antung Anthony Liu

    (Indiana University School of Public and Environmental Affairs)

  • Hiroaki Yamagami

    (Seikei University
    University Paris 1 Panthéon-Sorbonne)

Abstract

We examine the hypothesis that induced technological change (ITC) can dramatically lower the cost of a carbon tax in a static optimal tax model. The research and development sector is represented by an aggregate stock of energy-saving technology, which acts as a weak substitute with a polluting resource in the energy generation sector. Using this model, we analytically show how ITC occurs and affects the cost of a carbon tax. Applying quantitative estimates of the size of ITC to numerical simulations calibrated to the US economy, we find that existing empirical evidence can reduce the welfare cost of environmental tax reform by 12%. Our tests of alternative parameters show that this result is highly sensitive to the assumptions used, suggesting that ITC could result in much larger reductions in cost.

Suggested Citation

  • Antung Anthony Liu & Hiroaki Yamagami, 2018. "Environmental Policy in the Presence of Induced Technological Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(1), pages 279-299, September.
    • Handle: RePEc:kap:enreec:v:71:y:2018:i:1:d:10.1007_s10640-017-0150-7
    DOI: 10.1007/s10640-017-0150-7
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    References listed on IDEAS

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    3. Marek Loužek, 2023. "Ekonomická teorie inovací," Politická ekonomie, Prague University of Economics and Business, vol. 2023(5), pages 619-638.

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    More about this item

    Keywords

    Induced technological change; Double dividend; Carbon taxes; Optimal environmental tax; Returns to specialization;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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