Investment in risky R&D programs in the face of climate uncertainty

We analyze how the socially optimal technology R&D investment changes with the risk-profile of the R&D program and with uncertainty about climate damages. We show that how technology is represented in the model is crucial to the results; and that uncertainty in damages interacts with uncertainty in the returns to R&D. We consider R&D that reduces the cost of abatement multiplicatively, and argue that this is a good representation of R&D into non-carbon technologies; and R&D that reduces the emissions-to-output ratio, and argue that this is a good representation of R&D into fossil fuel technologies. For R&D programs into non-carbon technologies, optimal investment is higher in riskier programs. Our empirical model indicates that the optimal investment in a risky program is about 3 1/2 times larger than in a program with certain returns. For R&D programs aimed at reducing emissions in fossil fuel based technologies, our results show that, qualitatively, investment is higher in less risky programs under most uncertain damage scenarios. Our empirical model shows, however, that the risk-profile of fossil fuel based R&D programs generally has little quantitative impact on optimal investment. The exception is that when the probability of a catastrophe inducing full abatement is very high, investment is about twice as high in risky programs compared to programs with certain returns.