AbstractA carbon tax can induce innovation in green technologies. I evaluate the quantitative impact of this channel in a dynamic, general equilibrium model with endogenous innovation in fossil, green, and nonenergy inputs. I discipline the parameters using evidence from historical oil shocks, after which both energy prices and energy innovation increased substantially. I find that a carbon tax induces large changes in innovation. This innovation response increases the effectiveness of the policy at reducing emissions, resulting in a 19.2 percent decrease in the size of the carbon tax required to reduce emissions by 30 percent in 20 years. (JEL H23, O31, Q41, Q48, Q54, Q55, Q58)
American Economic Journal: Macroeconomics – American Economic Association
Published: Jan 1, 2018
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