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Climate Policy, Uncertainty, and the Role of Technological Innovation

Fischer, Carolyn and Thomas Sterner. 2012. “Climate Policy, Uncertainty, and the Role of Technological Innovation.” Journal of public Economic Theory 14:2: 285-309.
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We study how uncertainty about climate change severity affects the relative benefits of early abatement and a portfolio of research and development (R&D) in lowering future abatement costs. Optimal early abatement depends on the curvature of the marginal benefit and marginal abatement cost (MAC) functions and how the uncertain parameter affects marginal benefits.

R&D in a particular technology depends on whether uncertainty increases early abatement; whether investment lowers marginal costs for that technology; whether R&D lowers the slope of that technology's MAC function; and the shape of that technology's MAC function. We illustrate, focusing on the role of backstop technologies.