Environmental and Technology Policies for Climate Change and Renewable Energy

We assess different policies for reducing carbon dioxide (CO2) emissions and promoting the innovation and diffusion of CO2-reducing power technologies: (1) emissions price, (2) tax on fossil power, (3) tradable emissions performance standard, (4) market share requirement for renewables, (5) renewables production subsidy, and (6) R&D subsidy for renewables. We evaluate the relative performance of the policies according to incentives they provide along different avenues for emissions reduction, their efficiency, and other salient outcomes. We also assess how the nature of technological progress-whether it occurs by learning by doing or R&D investment and the degree of knowledge spillovers -affects the desirability of different policies. In a numerical application for modest U.S. electricity sector policies, the relative cost of the policies in achieving reductions is roughly in the order given above, with an emissions price being the most cost-effective, an R&D subsidy the least, and the others in between.