Can Technological Innovation Help China Take on Its Climate Responsibility? A Computable General Equilibrium Analysis

This paper examines the effectiveness of China's indigenous R&D investment and technological innovation to curb its carbon emissions. The mechanism of endogenous technical change (TC) is incorporated an intertemporal computable general equilibrium (CGE) model. R&D investments and knowledge creations are modeled as the endogenous behaviors of private firms. The accumulated stocks of knowledge are applied in the production process to affect the rate and bias of TC. Simulation results show that: 1) While China's indigenous R&D efforts play a significant role to curb carbon emissions, sole dependence on R&D may be far from sufficient to achieve China's pledged Copenhagen climate target with complementary policies being required to reinforce existing climate actions; 2) Innovation policies including public R&D subsidy and stringent patenting system can help strengthen economy-wide R&D investment and further reduce emissions, but this complementary effect is still minor and insufficient to meet the stipulated emission cuts target; 3) Carbon taxation can create significant carbon-saving benefits and fulfill climate target, but this achievement is at the cost of economic losses. The induced technical improvement, however, can partially mitigate the deadweight loss incurred by carbon tax distortion.