1. Climate Policies and Induced Technological Change: The Impacts of Timing of Technology Subsidies Presentation at Samstemt workshop November 20 2003 Knut Einar Rosendahl, Research Department, Statistics Norway by Snorre Kverndokk Knut Einar Rosendahl Thomas F. Rutherford

2. 2 Introduction Technological development – is crucial to reach long-term climate goals – is not autonomous, but partly induced by market incentives and policy measures – is characterised by market failures (spillovers) Optimal climate policy – may involve both carrot (subsidies) and stick (taxes) – has an important time dimension – requires lots of information, e.g. about the future Suboptimal climate policy – what are the costs compared to optimal policy?

3. 3 Carbon-free energy technologies – Today:  Various costly, inflexible technologies – Future:  ??  Learning/deployment potential for existing technologies  Development of new technologies  Lock-in of suboptimal technologies? – Future development is partly induced  How does carbon taxes and/or technology subsidies affect the future development of carbon-free technologies?  What is the optimal climate policy, and what are the consequences of simpler policy rules?

4. 4 Stylised equilibrium model Intertemporal welfare optimisation with representative consumer – consumes energy and other goods – climate restriction only affects energy production 3 energy technologies (perfect substitutes) – Defender ( DEF ): Fossil fuel based energy technology. No LBD. – Challenger ( CHL ): Existing carbon-free energy technology. High costs. LBD. – Advanced ( ADV ): Future carbon-free energy technology – available in 2050. Low costs. LBD.

5. 5 Learning by doing (LBD) – Production of carbon-free energy gives experience, and reduces unit costs – LBD is assumed to be external to the firm (i.e., spillovers) Technology constraints – Expansion and contraction constraints prevent too rapid changes in the energy mix (internalised) Climate restriction – Constraint on cumulative carbon emissions until 2200 Policy measures: – Carbon taxes and subsidies on carbon-free energy

6. 6 Alternative scenarios are simulated: – No governmental intervention (baseline) – Optimal climate policy – Suboptimal policy w.r.t. CHL (existing carbon-free energy)  constant subsidy rates over time (2000-2060)  carbon tax optimally chosen – Delayed carbon tax until 2020

7. 7 Energy supply in baseline scenario

8. 8 Energy supply with optimal abatement

9. 9 Unit costs with optimal abatement

10. 10 Subsidy rates on CHL in alternative scenarios

11. 11 Energy price impacts in alternative scenarios

12. 12 Economic costs of alternative scenarios

13. 13 Conclusions Learning spillovers imply that a combination of carbon taxes and subsidies is optimal Optimal subsidy rate varies significantly over time – highest initially Constant subsidy rate increases abatement costs only slightly – insignificant difference when subsidy rate is close to average optimal rate Uncertainty about future technological development crucial – calls for more sensitivity analyses – stochastic framework preferable