Measuring the value of induced technological change

In this paper, we analyze the value of induced technological change (ITC) for cutting the costs of reaching climate stabilization targets using techniques from the tax burden literature. First, ITC is valuable as it increases the elasticity of emissions with respect to carbon prices, and thereby it decreases the burden associated with an enforced emission reduction. Second, under ITC, emission abatement may generate a positive learning dividend when the social value of the induced change in learning exceeds its costs. We discuss under which assumptions we expect ITC to turn out a valuable feature, or not. We also carry out a numerical analysis with two models, one focusing on energy savings, the other focusing on energy transition. The models suggest that both the decreased carbon tax burden and the learning dividend gain can be substantial, compared to the costs of abatement without ITC. (C) 2007 Elsevier Ltd. All rights reserved.