Endogenizing technological change: Matching empirical evidence to modeling needs

Given that technologies to significantly reduce fossil fuel emissions are currently unavailable or only available at high cost, technological change will be a key component of any long-term strategy to reduce greenhouse gas emissions. In light of this, the amount of research on the pace, direction, and benefits of environmentally-friendly technological change has grown dramatically in recent years. This research includes empirical work estimating the magnitude of these effects, and modeling exercises designed to simulate the importance of endogenous technological change in response to climate policy.Unfortunately, few attempts have been made to connect these two streams of research. This paper attempts to bridge that gap. We review both the empirical and modeling literature on technological change. Our focus includes the research and development process, learning by doing, the role of public versus private research, and technology diffusion.Our goal is to provide an agenda for how both empirical and modeling research in these areas can move forward in a complementary fashion. In doing so, we discuss both how models used for policy evaluation can better capture empirical phenomena, and how empirical research can better address the needs of models used for policy evaluation.     

Impact assessment of emissions stabilization scenarios with and without induced technological change

The main aim of this paper is to investigate quantitatively the economic impacts of emissions stabilization scenarios with and without the inclusion of induced technological change (ITC). Improved technological innovations are triggered by increased research and development (R&D) expenditures that advance energy efficiencies. Model results show that ITCs due to increased investment in R&D reduce compliance costs. Although R&D expenditures compete with other investment expenditures, we find that increased R&D expenditures improve energy efficiency, which substantially lowers abatement costs. Without the inclusion of ITC, emissions targets are primarily reached by declines in production, resulting in overall welfare reductions. With the inclusion of ITCs, emissions mitigation can result in fewer production and GDP drawbacks.     

Useful models for simulating policies to induce technological change

Conventional top-down and bottom-up energy–economy models have limitations that affect their usefulness to policy-makers. Efforts to develop hybrid models, that incorporate valuable aspects of these two frameworks, may be more useful by representing technologies in the energy–economy explicitly while also representing more realistically the way in which businesses and consumers choose between those technologies. This representation allows for the realistic simulation of a wide range of technology-specific regulations and fiscal incentives alongside economy-wide fiscal incentives and disincentives. These policies can be assessed based on the costs required to reach a goal in the medium term, as well as on the degree to which they induce technological change that affects costs over long time periods.     

On the sources of technological change: Assessing the evidence

This paper uses a selective review of the economic literature on technological change to support four points that are important for interpreting and incorporating technological change into formal models of energy and the environment. The review (1) supports the notion that no single source dominates the process of technological change. It supports roles for R&D and learning-by-doing within an industry, as well as for spillovers from other industries engaged in both of these activities. The literature also (2) supports a strong role for spillovers; (3) indicates that these spillovers are often indirect, requiring own-industry activities to utilize; and (4) indicates that simple experience curve calibrations often used in formal models likely include a range of sources of technological change in addition to learning-by-doing, some of which might not be induced by the sorts of policies typically considered in the climate context.     

A MERGE model with endogenous technological change and the cost of carbon stabilization

Two stylized backstop systems with endogenous technological learning (ETL) are introduced in the “model for evaluating regional and global effects” (MERGE): one for the electric and the other for the non-electric markets. Then the model is applied to analyze the impacts of ETL on carbon-mitigation policy, contrasting the resulting impacts with the situation without ETL. We model research and development (R&D) spending and learning subsidies for the demonstration and deployment stage as control variables, and we investigate the ability of this extra spending to create path-dependent experience and knowledge to aid in the implementation of carbon-free technologies. Based on model estimations and sensitivity analyses, we conclude that increased commitments for the development of new technologies to advance along their learning curves has a potential for substantial reductions in the cost of mitigating climate change and thereby helping to reach safe concentrations of carbon in the atmosphere.     

The value of technological advance in decarbonizing the U.S. economy

This paper examines the role of technology in managing the costs of a carbon constraint on the U.S. economy. Two portfolios of technology are examined. One reflects modest investments in climate-friendly technologies, the other more aggressive development. The analysis indicates that the development of a broad range of low- to zero-carbon emitting technologies can substantially reduce (but not eliminate) the economic cost of decarbonization. By enabling large-scale emission reductions on the supply-side, costly reductions in demand are avoided. In particular, the emergence of electricity as a low-carbon fuel provides a powerful lever for achieving reductions in other sectors of the economy at lower cost. While the analysis suggests that there is no “free lunch,” the bill, which may indeed be well worth paying, can be greatly reduced through an accelerated R&D program and successful diffusion of new technology throughout the economy.     

Why did the energy intensity fall in China's industrial sector in the 1990s? The relative importance of structural change and intensity change

There have been a variety of studies investigating the relative importance of structural change and real intensity change to the change in China's energy consumption in the 1980s. However, no detailed analysis to date has been done to examine whether or not the increased energy efficiency trend in the 1980s still prevailed in the 1990s. This article has filled this gap by investigating the change in energy consumption in China's industrial sector in the 1990s, based on the data sets of value added and end-use energy consumption for the 29 industrial subsectors and using the newly proposed decomposition method of giving no residual. Our results clearly show that the overwhelming contributor to the decline in industrial energy use in the 1990s was the decline in real energy intensity, indicating that the trend of real energy intensity declines in the 1980s at the 2-digit level was still maintained in the 1990s. This conclusion still holds even if we lower the growth rate dramatically in line with the belief that the growth rate of China's GDP may be overestimated.     

Technological change and the timing of mitigation measures

We use a coupled carbon-cycle and energy systems engineering model to analyze the future time path of carbon emissions under an illustrative CO₂ concentration stabilization limit of 550 ppm. Our findings confirm the emission pattern as found by WRE: global emissions rise initially, pass through stabilization, in order to decline in the second half of the 21st century. We show that for a given CO₂ concentration target, emission trajectories within an intertemporal optimization framework depend mainly on two factors: the discount rate, and the representation of technological change as either static or dynamic. We obtain a similar near-term emission time path as WRE when using a model with static technology and a discount rate of 7%. We obtain a trajectory with lower emissions in the near-term when using a lower discount rate and/or treating technology dynamics endogenously in the model. We briefly outline a model that endogenizes technological change through learning curves. We then compare differences in emission trajectories between alternative model formulations of technological change. They are sufficiently small as to be of secondary importance when compared to treating CO₂ concentration stabilization as an inter-temporal optimization problem or not. Whereas our results confirm the computational results of WRE, we arrive nonetheless at different policy conclusions. If long-term emission reduction is the goal, we cannot follow ‘business as usual' even in the short-term. Action needs to start now. Action does not necessarily mean aggressive short-term emission reductions but rather enhanced R&D and technology demonstration efforts that stimulate technological learning. These are the necessary preconditions that long-term reduction targets can be met with improved technology and at costs lower than today. We close by pointing out two further critical issues: uncertainty, and the possible mismatch between the world of economic models and that of climate policy.     

Climate change and energy policy: The importance of sustainability arguments

It is the stated policy of the UK government to reduce emissions of carbon dioxide by 60% by 2050. This policy, which goes far beyond commitments under the Kyoto agreement, was originally advocated by the Royal Commission on Environmental Pollution, of which the author was a member. Its acceptance was seen by many as a surprising development, possibly reflecting the strength of the underlying case. The target was developed by a three-legged argument which reflects the three components of sustainability:     

Estimating energy-augmenting technological change in developing country industries

Assumptions regarding the magnitude and direction of energy-related technological change have long been recognized as critical determinants of the outputs and policy conclusions derived from integrated assessment models. Particularly in the case of developing countries, however, empirical analysis of technological change has lagged behind simulation modeling. This paper presents estimates of sectoral productivity trends and energy-augmenting technological change for several energy-intensive industries in India and South Korea, and, for comparison, the United States. The key findings are substantial heterogeneity among both industries and countries, and a number of cases of declining energy efficiency. The results are subject to certain technical qualifications both in regards to the methodology and to the direct comparison to integrated assessment parameterizations. Nevertheless, they highlight the importance of closer attention to the empirical basis for common modeling assumptions.     

The Kyoto mechanisms and technological innovation

Climate change response, including the implementation of the Kyoto targets as the first step, calls for technological innovation of future sustainable energy systems. Based on the Danish case, this paper evaluates the type of technological change necessary. During a period of 30 years, Denmark managed to stabilize primary energy supply, and CO₂ emissions decreased by 10%, during a period of 20 years. However, after the introduction of the Kyoto Mechanisms, Denmark has changed its strategy. Instead of continuing the domestic CO₂ emission controls, Denmark plans to buy CO₂ reductions in other countries. Consequently, the innovative technological development has changed. This paper evaluates the character of such change and makes preliminary recommendations for policies to encourage the use of the Kyoto Mechanisms as an acceleration of the necessary technological innovation.     

Update of indicators for climate change mitigation in Greece

This paper analyses the factors affecting greenhouse gas (GHG) emissions in Greece, (i.e. the drivers of pressures on climate change), using environmental indicators related to energy, demographics and economic growth. The analysis is based on the data of 2008 and considers types of fuel and sectors. The Kaya identity is used to identify the relationship between drivers and pressures, using annual time series data of National GHG emissions, population, energy consumption and gross domestic product. The analysis shows that over the period 2000–2008, GHG emissions show a slight variation, but they are almost stabilised, with a total increase of 1.6%. Despite the economic growth over that period, this stabilisation may be considered as a combination of reductions in the energy intensity of GDP and the carbon intensity of energy, which are affected by improvements in energy efficiency and introduction of “cleaner” fuels, such as natural gas and renewables in the energy mixture of the country.     

An assessment of the energy tax burden on the Philippine economy

This paper uses an aggregate modelling approach to assess the impacts of a redistribution of the taxes and duties that currently exist on crude oil and refined petroleum products in the Philippine economy. The approach used in the analysis consists of a general equilibrium model composed of fourteen producing sectors, fourteen consuming sectors, three household categories classified by income and a government. The effects of replacing the taxes and duties on crude oil and refined petroleum products with a more broad-based tax on manufacturing and service sectors output on prices and quantities are examined. The results are revealing. For example, the consequences of redistributing the tax burden away from petroleum products to the manufacturing and service sectors of the Philippine economy would be an increase in output by all producing sectors of about 3.5% or about 2.4 hundred billion Philippine pesos, a rise in the consumption of goods and services by about 6.1% or 1.6 hundred billion Philippine pesos, a rise in total utility by 6.9% or 1.9 hundred billion Philippine pesos and virtually no change in tax revenue for the government. When subjected to a sensitivity analysis, the results are reasonably robust with regard to the assumption of the values of the substitution eleasticities. That is, while the model's equilibrium values do vary in response to different assumptions of the values of these elasticities, the fluctutations are not so enormous to suggest that the model is unrealistically sensititve to these parameters.     

America's bottom-up climate change mitigation policy

Many diverse actions can be taken to reduce greenhouse gas (GHG) emissions. Increasingly in the United States, policy-makers at sub-national levels are setting emission targets and implementing plans for sector-specific GHG reductions. In this paper, local, state, and regional policy actions in the US are inventoried and analyzed as to their potential effect on national emissions. The realization of all existing sub-national initiatives, as of September 2007, could stabilize US emissions at 2010 levels by the year 2020. The scale of these many decentralized mitigation actions, and their tendency to follow consistent steps, provide a counterpoint to oft-cited drawbacks of decentralized environmental policy. It also indicates that the US has been more committed to climate change mitigation than is generally acknowledged.     

The environmental and economic impacts of the UK climate change agreements

The climate change agreements (CCAs) in the UK were negotiated with a number of energy-intensive industrial sectors, and offered a reduction in the rate of the climate change levy (CCL), provided that negotiated energy efficiency targets were met. Through modelling and by analysis of the results of the first target period, this paper analyses the stringency of the targets, and the economic and environmental implications of the CCAs. It concludes that, while the targets in themselves were not stringent, and were in the main met well before the due date, the CCAs appear to have had an ‘awareness effect’ in stimulating energy savings. This has resulted in overall environmental benefits above those which would have derived from the imposition of a flat-rate tax with no rebate and no CCAs, and economic benefits for the sectors and companies with which CCAs were negotiated.     

Interactions between energy security and climate change: A focus on developing countries

We briefly consider the tensions between climate change and energy security policy imperatives, and highlight some concepts that may bring additional clarity to decision-making at the nexus of the two areas. We focus on developing countries and use the case of the Medupi supercritical coal plant in South Africa. The justification for the plant's construction stemmed from an Integrated Resource Planning process informed by South Africa's national utility. Often, as in the case of South Africa, there are tensions not easily captured in quantitative algorithms between, inter alia, a lack of access to electricity by millions of people (and associated welfare losses) and greenhouse gas emissions from electricity generation. It is difficult to identify any formal processes that have prioritised climate change considerations over those of energy access. Thus, it becomes imperative to have a clear understanding of the consequences of this reality when considering power system expansion. We find that the processes often employed do not provide an entirely satisfactory precedent for future planning analyses, and the justifications do not adequately reflect the complexity of the decision space. Finally, we highlight some options by which these tools might be enhanced in areas including explicit and formal consideration of risk.     

Foreign trade and declining pollution in Sweden: a decomposition analysis of long-term structural and technological effects

This article examines whether there exists any causal relationship between foreign trade and declining pollution in developed countries. In other words, do developed countries outsource their problems to less developed countries rather than solve them? The case study is the Swedish economy and the two environmental indicators employed are energy consumption and CO₂ emissions. No causal relationships are found, since Sweden has long been a net exporter of embodied energy and CO₂ and continues to be so after 1970, when energy consumption stabilizes and CO₂ emissions decline. In addition, the ratios of net exported energy and CO₂ to total consumption remain stable, which means there were no effects on the energy intensity or CO₂ intensity either. These results suggest that internal forces, like efficiency improvements, changed consumption patterns and transformation of the energy system, have been crucial for relative environmental improvement in Sweden, while foreign trade has played no role.     

Multiple instruments to change energy behaviour: The emperor’s new clothes?

Over the last few decades, several instruments have evolved to deal with similar energy and environmental challenges. For instance, the economic literature prescribes separate tax or cap-and-trade systems to internalize negative environmental externalities and subsidies to internalize positive externalities such as research and development. However, policy is not straightforward because of the influence on cost and competition and concerns for regional employment, economic activity within certain industries and any distributional effects. Tax discrimination, subsidies and regulations then undermine the efficiency of energy instruments. To balance any environmental concerns, other instruments, including green and white certificates, have been created. While innovative, these work as simple combinations of taxes and subsidies. While the extant literature thoroughly analyzes the partial effects of these instruments, there has been little focus on their basics and the effects of aggregate taxes and subsidies. This complexity calls for research on the efficiency of each instrument, including the administration and transaction costs associated with holding a large set of instruments. We should consider the coordination and simplification of policy tools before complicating the system further by introducing new, primarily equivalent, instruments.

The experimental exploration of carbon nanofiber and carbon nanotube additives on thermal behavior of phase change materials

In this study, thermal properties of carbon nanofiber (CNF) and carbon nanotube (CNT) filled phase change materials (soy wax and paraffin wax) were studied experimentally, aiming to improve their thermal conductivities. The composite phase change materials (PCMs) were prepared by the stirring of CNF or CNT in liquid wax at 60 °C, with CNF and CNT doping levels of 1, 2, 5, and 10 wt%. The experimental results show that the thermal conductivity of composite PCMs increases as CNF or CNT loading contents. Both CNF and CNT can improve the thermal conductivity of the composite, while CNF is shown to be more effective than CNT as the thermal conductive filler because of its better dispersion in the matrix.