Path dependence, innovation and the economics of climate change

By Philippe Aghion, Cameron Hepburn, Alexander Teytelboym, Dimitri Zenghelis. Handbook on Green Growth, 2014

115 citations recorded by the source corpus.

Shifting our fossil-fuelled civilisation to clean modes of production and consumption requires deep transformations in our energy and economic systems. Innovation in physical technologies and social behaviours is key to this transformation. But innovation has not been at the heart of economic models of climate change. This paper reviews the state of the art on the economics of innovation, applies recent insights to climate change. The core insight is that technological innovation is a path-dependent process in which history and expectations matter greatly in determining eventual outcomes This insight has six important implications for climate policy design. First, efficient climate policy requires direct research subsidies for inducing and/or diffusing clean innovations, combined with carbon pricing (whether by taxes or trading). Second, both public and private sector involvement is required — private market forces need to be mobilised and redirected towards cleaner energy sources by governments. Third, path dependence and system inertia imply that delaying policies that redirect innovation towards clean technologies significantly increases costs in the future. Fourth, more developed countries should act as leaders in clean technology and should subsidise access to such technologies for less developed countries. At the same time, they should consider the possibility of using border carbon adjustments against any country that would take advantage of the new environmental policies by specialising in the production and export of fossil fuel intensive products. Fifth, if a transition from coal to clean energy is to be made via intermediates (for example, gas), the use of gas (without carbon capture) should be agreed to be on a time-limited basis. Further, to avoid gas lock-in, research in fully clean technologies would need to be strongly stepped up over the intervening period, along with other supportive policies. Finally, investment in coal should not be encouraged, as its continued use is only safe if we assume the cost-effectiveness of carbon capture and storage (CCS) technologies. While much greater efforts should be taken to reduce the costs of CCS, the speed that these technologies can be developed and deployed is uncertain.

Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment

View Paper: https://www.semanticscholar.org/paper/56e2afdbabb38b10c2ff5f02924d2bf1c63a676e

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Citations in the corpus

Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change? (2020, background): “Decisive state interventions are also required to stabilize the climate, by tipping energy and industrial systems towards newer, cleaner, and ultimately cheaper modes of production that become impossible to outcompete (Acemoglu et al., 2012; Grubb, 2014; Aghion et al., 2014; Farmer et al., 2019; Mea”
Economic growth and development with low‐carbon energy (2017, background): “Such non-marginal change is only now beginning to be evaluated in the theoretical and model-based literature, with an increased emphasis on the Schumpeterian dynamics of innovation, investment and “creative destruction” (Aghion et al. 2014).”
Assessing the impacts of ageing and natural resource extraction on carbon emissions: A proposed policy framework for European economies (2021, background): “Torras and Boyce (1998) demonstrated that energy innovations improve environmental quality, thereby attributing technical effect as the central feature in plummeting ambient pollution (Aghion et al. 2014).”
Innovation, growth and the transition to net-zero emissions (2021, background): “Nordhaus, 2018) are not focused on the processes of innovation and transformation (Aghion et al., 2014), or representing path dependence (Grubb et al.”
How economic growth, renewable electricity and natural resources contribute to CO2 emissions? (2018, background): “…in selected developed countries with lower growth rates but high income, where pollution reduction processes depend mainly on innovation in low-carbon technologies, technological changes could offset scale effect and delay technical obsolescence (Aghion et al., 2014, Álvarez-Herránz et al., 2017).”