Combining carbon tax and R&D subsidy for climate change mitigation

R&D industry is introduced into a CGE model (KEI-Linkages) as a means to mimic the endogenous technological progress in the Korean economy. We found that providing across-the-board subsidy on R&D expenditure may lead to an increase in the carbon intensity, as well as the real GDP for the Korean economy. However, when R&D subsidies are combined with a carbon tax, real GDP can grow without increasing CO2 emissions. Carbon tax on top of R&D subsidy represses the growth of carbon intensive industries compared to the case of stand-alone R&D subsidy policy. Furthermore, carbon intensive industries reduce carbon intensity by way of fuel mix change to cope with a higher carbon tax rate to meet the national CO2 reduction target. The final outcome impinges on the industry structure of the economy. Therefore, a careful study of the industry structure of the economy is warranted to maximize the effectiveness of climate change policy-mix.

► A recursive CGE model was used to analyze the impacts of various policy mixes. ► A new way to model induced technical changes is introduced. ► Across-the-board R&D subsidy may increase the carbon intensity of the economy. ► Yet, R&D subsidy with carbon tax can reduce carbon intensity and cost of mitigation.