Induced Technological Change: The Timing of Abatement and the Impact of Internalizing R&D Externalities in the BAU

Abstract

The economic modelling community has put great effort into incorporating endogenous technological change into their models; however, there is little consistency in the modeling of the business-as-usual scenario. This paper examines the impact of research and development externalities often included when considering induced technological change. These externalities should remain external to the representative agent. The optimal timing of abatement remains up for debate and the externalities internalized by the representative agent will affect the implied scale and timing effects of induced technological change. We follow the model of Shiell and Lyssenko (2014). We incorporate Gerlagh’s price deflator to normalize shadow values and to allow us to follow Mercenier and Michel (1994a, 1994b) in applying varying time periods. The model is solved for eight scenarios with various combinations of research and development externalities internalized in the business-as-usual. Without any externalities internalized by the representative agent, induced technological change is responsible for less than 20% of optimal abatement. That share of abatement appears higher with duplication and crowding out, and lower with leakage externalities internalized. We find evidence that induced technological change delays abatement, and that internalizing duplication and crowding out externalities exaggerates the delay while, while internalizing leakages negates it.