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Climate Policy, Uncertainty, and the Role of Technological Innovation

Authors


  • Carolyn Fischer, Senior Fellow, Resources for the Future (RFF), Washington, DC (Fischer@rff.org). Thomas Sterner, Professor of Environmental Economics, University of Gothenburg, P.O. Box 640 40530, Gothenburg, Sweden; University Fellow, RFF (Thomas.sterner@economics.gu.se).

  • Financial support from the Swedish Research Councils Formas and Mistra (through its climate program CLIPORE/INDIGO), as well as the Environmental Economics project at the Centre for Advanced Study (CAS), Norwegian Academy of Science and Letters, is gratefully acknowledged. We are indebted to Michael Hoel for the invitation to CAS and for valuable comments and to Miguel Quiroga for research assistance. Thanks also for valuable comments from Antoine d'Autume, Nicholas Stern, Roger Guesnerie, and Bill Nordhaus at the Collège de France Colloque June 2010.

Abstract

We study how uncertainty about climate change severity affects the relative benefits of early abatement and a portfolio of research and development (R&D) in lowering future abatement costs. Optimal early abatement depends on the curvature of the marginal benefit and marginal abatement cost (MAC) functions and how the uncertain parameter affects marginal benefits. R&D in a particular technology depends on whether uncertainty increases early abatement; whether investment lowers marginal costs for that technology; whether R&D lowers the slope of that technology's MAC function; and the shape of that technology's MAC function. We illustrate, focusing on the role of backstop technologies.

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