Climate Change 2001:
Working Group III: Mitigation
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Empirical analyses109 of the relative effects of alternative environmental policy instruments on the rate and direction of technological change are limited in number, but those available focus on technological change in energy efficiency, and thus are potentially of direct relevance to global climate policy. These studies can be considered within the three stages of technological change introduced above–invention, innovation, and diffusion. It is most illuminating, however, to consider the three stages in reverse order.

Beginning, then, with empirical analyses of the effects of environmental policy instruments on technology diffusion, Jaffe and Stavins (1995) conducted econometric analyses of the factors that affected the adoption of thermal insulation technologies in new residential construction in the USA from 1979 to 1988. They examined the dynamic effects of energy prices and technology adoption costs on average residential energy-efficient technologies in new home construction. The effects of energy prices can be interpreted as suggesting what the likely effects of taxes on energy use would be, and the effects of changes in adoption costs can be interpreted as indicating what the effects of technology-adoption subsidies would be. They found that the response of mean energy efficiency to energy price changes was positive and significant, both statistically and economically. Interestingly, they also found that equivalent percentage cost subsidies would have been about three times as effective as taxes in encouraging adoption, although standard financial analysis suggest they ought to be about equal in percentage terms. This finding does, however, offer confirmation for the conventional wisdom that technology adoption decisions are more sensitive to up-front cost considerations than to longer-term operating expenses.

In a study of residential conservation investment tax credits, Hassett and Metcalf (1995) also found that tax credit or deductions were many times more effective than “equivalent” changes in energy prices–about eight times as effective in their study. They speculate that one reason for this difference is that energy price movements may be perceived as temporary. The findings by Jaffe and Stavins (1995), and by Hasset and Metcalf (1995) are consistent with other analyses of the relative effectiveness of energy prices and technology market reforms in bringing about the adoption of lifecycle cost-saving technologies. Up-front subsidies can be more effective than energy price signals (see, e.g., Krause et al., 1993; Howarth and Winslow, 1994; IPSEP, 1995; Eto et al., 1996; Golove and Eto, 1995; IPCC, 1996, Executive Summary, p. 13). A disadvantage of such non-price policies relative to administered prices is that they have to be implemented on an “end-use by end-use” or “sector by sector” basis in a customized fashion. Also, an effective institutional and regulatory framework needs to be created and maintained to evaluate and ensure the continued cost-effectiveness of such policies.

This and other research on energy efficiency programmes also highlights a major difference in the way energy price signals and technology subsidies function. The technology adoption response to taxes may include a secondary increase in the demand for energy services. This secondary effect takes two forms: a direct effect that results from the increased utilization of energy-using equipment and capital stocks, and an indirect effect from increased disposable income. Studies of such demand effects suggest that the combined effects are generally not sufficient to offset more than a minor portion of emissions reductions.

In addition, technology subsidies and tax credits can require large public expenditures per unit of effect, since consumers who would have purchased the product even in the absence of the subsidy will still receive it.110

Some recent empirical studies suggest that the response of relevant technological change to energy price changes can be surprisingly swift. Typically, this is less than 5 years for much of the response in terms of patenting activity and the introduction of new model offerings (Jaffe and Stavins, 1995; Newell et al., 1999; Poppe, 1999). Substantial diffusion can sometimes take longer, depending on the rate of retirement of previously installed equipment. The longevity of much energy-using equipment reinforces the importance of taking a longer-term view towards energy-efficiency improvements–on the order of decades.

An optimal set of policies would be designed in such a way as to achieve two outcomes simultaneously: release any obstructed emission and cost-reduction potentials from already available technologies through various market reforms that try to reduce market distortions (see IPCC, 2000), and induce the accelerated development of new technologies. This approach allows significant carbon abatement over the near-term by diffusing existing technologies, while at the same time preparing new technologies for the longer term.

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