WEAI/AERE 2012 - Individual Paper Abstract
Title: Climate Policy: Effects of Knowledge Stocks in a CGE Framework
Author(s): Ramiro PARRADO, Fondazione Eni Enrico Mattei, Isola di San Giorgio Maggiore, 30124 Venice, Italy, +39 041 2700451, +39 041 2700413, ramiro.parrado@feem.it; Sebastian Voigt, Zentrum fur Europaische Wirtschafsforschung GmbH (ZEW)
Abstract:
The data structured in the system of national accounts provides the basis for extensive analysis by allowing the construction of input-output databases and also social accounting matrices in which computable general equilibrium (CGE) models are based on. CGE models are a useful tool for policy analysis. They are also used in climate change assessments considering both potentially wide economic impacts of inaction as well as possible responses through different climate policy alternatives. In this context, the provision of R&D data constitutes a fundamental step to consider the implementation of endogenous technical change (ETC) in different modelling exercises. Moreover, considering explicitly ETC establishes a crucial issue in policy and impact assessments since the inclusion of feedback mechanisms allows a better understanding of direct and indirect effects.
Most of the general equilibrium framework literature with a focus on modelling R&D induced technical change is based on aggregated growth models or optimal growth models considering macro regions. There are fewer studies using multi sector CGE models taking into account knowledge stocks at the national level. Until now, the availability of reliable R&D data and the complexity of including it on a SAM have proven a challenge to provide a multi region and multi sector database with R&D stocks and flows. This paper builds upon the recent efforts to supply more consistent data on R&D and the previous experiences to model technical change. It includes an ETC specification in a global CGE model based on sector specific knowledge stocks. This allows analysing the different implications of selected policies, including trade, R&D, and technology transfers. Accordingly, the main contributions of the paper are: i) to produce a coherent and integrated database including region and sector specific flows and stocks of knowledge, based on a SAM structure, ii) to extend a multi-sector and multi country CGE model with a knowledge based endogenous technical change specification using the integrated database, and iii) to use the improved model for assessing the differences and implications of a carbon tax policy over a traditional autonomous (exogenous) technical change formulation.
An ETC model shows more flexibility for regions than can accumulate more knowledge. Investments in R&D and knowledge stocks allow reducing a carbon tax burden in the future. The model with ETC produces a higher cost of climate policies, but at the same time lower carbon intensities. Moreover, in the presence of a carbon tax, there are redistributive effects on R&D investments and knowledge accumulation. High carbon based fuels reduce their output while other industries increase their production. However, during the first years of the implementation of the carbon tax, there is evidence of a market size effect that increases R&D investments in sectors with a significant size such as the coal industry. When a carbon tax is imposed, the accumulation of knowledge is lower either when the capital-energy substitution is higher, or when elasticities of supply for fossil fuels are lower.