Report Examines How Climate Policies Affect The Cost Of Greenhouse Gas Mitigation

  • October 13, 2004
  • By Lawrence Goulder
Over the upcoming decades, large-scale reductions in emissions of carbon dioxide (CO2) and other greenhouse gases (GHGs) will be required to reduce the risks of global climate change. In order to achieve this transformation, the development and diffusion of new technologies to reduce GHG emissions will be critical. As the world's largest and most inventive economy, the United States must play a decisive role in the discovery, innovation, and marketing of these new technologies, and climate policies can be influential drivers in this process.

Technological change occurs for a variety of reasons as firms compete in existing and new markets. However, climate policies can spur additional or “induced” technological change (ITC). This can be achieved through technology “push” policies that boost the invention and innovation processes (such as funding for R&D), and through direct emissions control policies that “pull” new technologies into the market (such as a GHG cap-and-trade program).

In this report, Lawrence Goulder of Stanford University explores the role of induced technological change (ITC), and examines the implications of ITC for the effective design of climate policy. These implications fall into four main categories: (1) how much ITC can lower the costs of climate policies, (2) what this means for the timing of policies, (3) the value of announcing policies well in advance of enactment, and (4) the most appropriate use of various policy instruments to boost technological change. Until recently, economic models of climate change could not address these issues. However, state-of-the-art modeling now treats ITC as an integral or “endogenous” component in calculations, thus providing new insights into this critical topic.