An Integrated Assessment Model With Endogenous Growth

We introduce endogenous directed technical change into integrated multi-region policy assessment based on macroeconomic theory and evidence. Technical progress can be directed towards labor or energy savings. We distinguish expenditures on innovation and imitation, in other words international technology transfer, and take the role of capital investment in implementing new technologies into account. We study the regional pattern of mitigation costs in form of consumption losses induced by a global carbon budget-based climate policy. Mitigation costs turn out to be robust with respect to a variation in the parameter values within our model of endogenous growth – except the effectivity (in terms of technical progress per unit of investment) of energy specific rela- tive to labor specific innovation and imitation expenditures. This result suggests that an increased effectivity of energy specific innovation and imitation expenditures can overcompensate rising emissions due to economic growth and thus reduce mitigation costs. However, the effectivity is exogenously determined by technological restrictions and at best partly susceptible by economic policy in the short-run. In the medium- to long-run, the effectivity could be improved by emphasizing energy efficiency aspects in education, basic research, infrastructure, structural change and capacity building for R&D and for the absorption of foreign technologies.

Motivated by recent announcements of providing financial and technological transfers for developing countries, we examine interregional energy saving technology transfer starting at different points of time. Herein, all regions gain from technology transfer due to its growth effect. China appears as the main beneficiary of early technology transfer because of strong international technology spillovers, followed by the region of the developing countries.

Our results suggest that endogenous energy specific technical progress has already been strongly exploited in the business as usual baseline and created baseline consumption gains. This might be due to perfect foresight and regionally weighted global optimization in combination with energy scarcity. But in reality, the baseline gains are not fully exploited on a market base due to risks and frictions and missing information. Realizing these gains probably requires policy support in form of an integrated climate and energy policy concept. Herein, early energy saving technology transfer could be a "carrot" to encourage developing countries to engage in climate protection.

Hübler, Michael, Lavinia Baumstark, Marian Leimbach, Ottmar Edenhofer and Nico Bauer (2012), An Integrated Assessment Model With Endogenous Growth, ZEW Discussion Paper No. 12-054, Mannheim.