Global warming, uncertainty and endogenous technical change: Implications for Kyoto

The purpose of the present paper is to describe the role of uncertainty and technical change in an environmental context. Which impact does ecological uncertainty have on physical and R&D investments' decisions? How are pollution trajectories modified when uncertainty is taken into account? To reply to these questions we modify the ETC-RICE model described in Buonanno et al. (2000) by embedding in it the "hazard rate function" approach as in Bosello and Moretto (1999). With such a model we are also able to study some consequences of the implementation of the Kyoto agreement under different policy options - i.e. with or without different degrees of introduction of one of the so-called "flexibility mechanisms" (specifically, the Emissions Trading) - in order to assess its impact on agents' behaviour in terms of domestic abatement, consumption, physical and environmental investment, trading of emissions rights (quantity and price). The results show that uncertainty strongly influences agents' behaviour; in particular, agents calm down the increase of temperature via lower emissions. In addition, R&D expenditures are a mean exploited in order to trigger the "engine of growth" only when environmental endogenous technical change is allowed. However, even if uncertainty may stimulate technical change, long-run growth is negatively affected by its presence as predicted by the theory (e.g. Clarke and Reed 1994; Tsur and Zemel 1996; and Bosello and Moretto 1999).