Technological uncertainty and cost effectiveness of CO2 emission reduction

This paper studies implications of uncertainty about CO₂ backstop technology for cost effectiveness of CO₂ emission reduction policy. For this purpose, we develop a dynamic general equilibrium model that captures empirical links between CO₂ emissions associated with energy use, the rate and direction of technical change and the economy. We specify CO₂ capture and storage (CCS) as the backstop technology whose arrival is anticipated or not. We find a negative value of information in that the discounted welfare loss associated with the emission reduction is lower if CCS is not anticipated. CO₂ shadow prices are then relatively high in the years before the CCS has arrived. By not simply waiting with the emission reduction until CCS has arrived, one relies more on economy wide technical change and its welfare enhancing technology externalities in turn allowing for a higher steady state. We believe that policy makers should thus be prudent in designing CO₂ emission reduction policy and be careful not to let polluters become complacent by postponing some of their emission reduction efforts awaiting the silver bullet technology on the horizon.