1 The role of innovation in climate change mitigation: new perspectives using the WITCH model V.Bosetti*, C.Carraro*, R.Duval**, M.Tavoni* * FEEM, ** OECD Economics Department

2 Motivation for the paper Issue of role of innovation support in international climate policy package has gained prominence: - Energy R&D spending is low and has declined - Innovation failures (R&D and learning spillovers) and environmental externalities call for joint policy intervention in both areas - International cooperation may be easier to achieve on R&D than on mitigation (recent game-theoretic literature) - And indeed technology (although not so much innovation) issue at the core on ongoing climate negotiations

3 Purpose of the paper Little analysis of environmental and economic gains from innovation in GE framework so far Paper contributes to this literature by providing quantitative assessment of extent to which: 1. Stand-alone innovation policies could reduce emissions/stabilise concentration 2. Innovation policies, when used as a complement to a carbon price, could lower cost of climate stabilisation

4 The WITCH model Hybrid IAM developed by climate change group at FEEM: - Forward-looking optimal (Ramsey-type) growth model - Climate module and feedback through damage function - Specific representation of energy sector: 6 fuel types, 7 technologies for electricity (+1 advanced tech, see below) Game-theoretic framework: - 12 regions set optimal paths of investments (goods, energy, R&D) to maximise PV of (log) consumption - 2 solutions concepts: fully cooperative solution (world social planner), non-cooperative solution (Nash equilibrium)

5 Endogenous technological change in WITCH 3 main channels / 3 main innovation policy areas: - Energy efficiency (E.E) improvements through R&D investments (LbR with high but decreasing social returns) - LbR and Learning-by-doing (LbD) in wind, solar and CCS (W+S & CCS) via 2-factor learning curves - LbR and LbD in 2 unspecified “advanced” techs (substitutes for nuclear in EL and oil in NEL): calibrated on past experience with other techs, arbitrarily high initial price, 10-year commercialisation lag International knowledge and technology spillovers: - R&D and/or technology deployment in 1 country increase R&D and/or deployment returns elsewhere

6 1. Innovation as a stand-alone policy We consider a global R&D fund amounting to 0.08% of world GDP (~ early 1980s level > 4 times current levels) 3 possible allocations : E.E, W&S + CCS, advanced techs Main finding: no such Fund can reduce emissions from current levels  continuous rise in concentrations ~ BAU Advanced techs policy misses medium-term abatement opportunities but is still >> E.E and W&S+CCS: - E.E: decreasing returns to R&D, no decarbonisation - W&S + CCS: decreasing returns to R&D, all the more so with limits to price declines and storage constraints

7 1. Innovation as a stand-alone policy (continued) Sensitivity analysis: - Varying the size of the fund (up to 2% of world GDP), no fund of any size succeeds in reducing emissions from current levels This reflects decreasing marginal returns to R&D in long run, and positive impact of R&D on GDP & emissions - Varying the allocation of the fund across 3 types of R&D, no significant improvement is achieved relative to the advanced techs case - Overall, maximum achievable emission reduction relative to BAU ~ 15% at 2100 horizon

8 2. Carbon pricing and endogenous technological change Innovation policies are environmentally ineffective but may still bring eco efficiency gains  assess these gains 2 scenarios : BAU (non-cooperative solution) and 450 ppm CO2 (non-cooperative solution under world emission constraint) Carbon pricing alone has large effects on energy R&D and technology deployment… …which in turn has a sizeable impact on mitigation costs, with option to invest in advanced techs being crucial (nearly halves discounted costs) E.E and W&S+CCS matter much less than advanced techs, consistent with analysis of stand-alone policies

9 2. Carbon pricing and endogenous technological change (continued) The NEL advanced tech is more important than the NEL one for lowering mitigation costs: - Higher abatement costs in NEL  larger gains from R&D - The EL advanced tech would matter more if existing options (W&S, nuclear, CCS) were constrained Advanced techs do not come for free: - Strong carbon price signal needed in the first decades to provide incentives to invest in advanced techs - Global mitigation costs actually rise in the first decades, reflecting diversion of resources towards R&D

10 2. Efficiency gains from hybrid carbon pricing/innovation policies International R&D spillovers suggest potential gains (international innovation policies yield an economic gain) We consider again a global R&D policy amounting to 0.08% of world GDP with the 3 possible allocations Results: discounted cost savings relative to carbon pricing alone = between 1% (E.E) and 8% (advanced techs) under 450 ppm CO2 scenario Cost savings are larger under less stringent targets, e.g. 15% for advanced techs policy under 550 ppm CO2 scenario

11 Conclusions Innovation policies cannot be effective if used as stand- alone policies (lags, decreasing returns to R&D)… …but can lower the cost of a climate policy package, especially if focused on NEL advanced technologies The magnitude of this economic efficiency gain ultimately depends on the magnitude of R&D spillovers not already internalised by carbon price Magnitude of international R&D spillovers is subject to debate + not all such R&D spillovers are captured in WITCH (e.g. apropriability problems)  room for future work

12 Thank you!

13 Figures

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15 Carbon emission paths under alternative allocations of the global R&D fund

16 Carbon emission paths under alternative sizes of the global R&D fund (allocated to all 3 types of R&D simultaneously)

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23 Cost savings from hybrid innovation/carbon pricing policies (% GDP gain relative to carbon pricing alone, 450 ppm CO2 scenario )

24 The Energy Sector EL2 OUTPUT KL K ES L HEEN EL NEL OILnelGASnel COALnel OGB ELHYDRO ELFF ELCOAL ELPC ELIGCC ELOILELGAS ELW&S 1/ /2 2 2    Biofuel TradBiom ELNUKE Trad Biofuel Advanced Biofuel 

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