Impact of market research externalities on induced technological change and timing of pollution abatement

Abstract

The present study aims at identifying the impact of misspecification of the business-as-usual with respect to market research externalities (crowding out, duplication and inter-firm spillovers) on the timing of abatement. We were motivated by the inconsistencies in the literature regarding the conditions defining the baseline scenario when attempting to model climate change policies. As mentioned by a few authors, the proper baseline scenario must reflect reality, and assume that all market research externalities are considered external by the representative agent in the business-as-usual. For our purpose, we adapted the ENTICE-inspired top-down general equilibrium model elaborated by Shiell & Lyssenko (2014) by altering the conditions defining the business-as-usual. For instance, we formulated a variety of scenarios that each differ in their treatment of research market externalities, in particular duplication, crowding out and inter-firm spillovers. By comparing the results of simulations for each scenario, we were then able to single out the individual impact of market research externalities on abatement levels and the level of induced technological change. Results show that internalizing market research externalities in the business-as-usual alters the relevance of induced technological change and accelerates abatement following the implementation of first-best policy. In other words, the internalization of research market externalities in the business-as-usual underestimates, in some scenarios, the role of induced technological change in emissions mitigations, a result that was presented by Goulder & Mathai (2000) that specified their baseline scenario assuming that all research market externalities were internalized.