A climate-change policy induced shift from innovations in carbon-energy production to carbon-energy savings

We develop an endogenous growth model with capital, labor and carbon-energy as production factors and three technology variables that measure accumulated innovations for carbon-energy production, carbon-energy savings, and neutral growth. All markets are complete and perfect, except for research, for which we assume that the marginal social benefits exceed the marginal private benefits by factor four. The model constants are calibrated so that the model reproduces the relevant global trends over the 1970-2000 period. The model contains a simple climate module, and is used to assess the impact of Induced Technological Change (ITC) for a policy that aims at a maximum level of atmospheric CO2 concentration (450 ppmv). ITC is shown to reduce the required carbon tax by more than a factor 2, and to reduce costs of such a policy by half. When we do not constrain aggregate R&D expenditures to benchmark levels, costs are further reduced. Numerical simulations show that knowledge accumulation shifts from energy production to energy saving technology. We discuss reasons for differences between our results and earlier results reported in the literature.