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