R&D investment strategy for climate change

The economic costs of stabilizing greenhouse gas concentrations over the coming century depend critically on the development of new technologies in the energy sector. Our research and development (R&D) investment strategy is the control variable for technology availability. This paper proposes an analytic framework for determining optimal R&D investment allocation and presents some numerical results to demonstrate the implementation of the methodology. The value of technological advance in three targeted areas-fossil-based generation, renewables, and carbon capture and storage-is represented by the increase in expected welfare in the presence of an emissions policy constraint of initially uncertain stringency. R&D expenditure increases the probability of advance. Optimal investment is determined by its relationship with success probability, which is assumed to exhibit decreasing returns to scale, relative to the value of success. While the numerical results are speculative, the paper offers insights into the nature of an optimal technology strategy for addressing climate change. (C) 2008 Elsevier B.V. All rights reserved.