Environmental and Technology Policies for Climate Mitigation

We assess different policies for reducing carbon dioxide emissions and promoting the innovation and diffusion of renewable energy. We evaluate the relative performance of policies according to incentives provided for emissions reduction, efficiency, and other outcomes. We also assess how the nature of technological progress—whether it occurs through learning by doing or R&D investment, and the degree of knowledge spillovers—affects the desirability of different policies. Due to knowledge spillovers, optimal policy involves a portfolio of different instruments targeted at emissions, learning, and R&D. In a numerical application to the U.S. electricity sector, the relative cost of individual policies in acheiving reductions is roughly as follows: (1) emissions price, (2) emissions performance standard, (3) fossil power tax, (4) renewables market share requirement, (5) renewables production subsidy, and (6) R&D subsidy for renewables. Nonetheless, an optimal portfolio of policies achieves emission reductions at significantly lower cost than any single policy.