This paper studies the cost-effectiveness of combining traditional environmental policy, such as CO2-trading schemes, and technology policy that has aims of reducing the cost and speeding the adoption of CO2 abatement technology. For this purpose, we develop a dynamic general equilibrium model that captures empirical links between CO2 emissions associated with energy use, directed technical change and the economy. We specify CO2 capture and storage (CCS) as a discrete CO2 abatement technology. We find that combining CO2-trading schemes with an adoption subsidy is the most effective instrument to induce adoption of the CCS technology. Such a subsidy directly improves the competitiveness of the CCS technology by compensating for its markup over the cost of conventional electricity. Yet, introducing R&D subsidies throughout the entire economy leads to faster adoption of the CCS technology as well and in addition can be cost-effective in achieving the abatement target.
- dynamic incentives
- firm incentives
Otto, V. M., & Reilly, J. (2008). Directed technical change and the adoption of CO2 abatement technology: The case of CO2 capture and storage. Energy Economics, 30(6), 2879-2898. https://doi.org/10.1016/j.eneco.2007.07.001