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2012-04-30 | Peer Reviewed

Climate Policy, Uncertainty, and the Role of Technological Innovation

Fischer, Carolyn and Thomas Sterner. 2012. “Climate Policy, Uncertainty, and the Role of Technological Innovation.” Journal of public Economic Theory 14:2: 285-309.
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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.