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Intergenerational cost–benefit analysis of climate change: an endogenous abatement approach

Published online by Cambridge University Press:  14 March 2007

Y. OKAN KAVUNCU
Y. OKAN KAVUNCU
Affiliation:
Department of Economics, University of California at Santa Barbara, Santa Barbara CA, 93106 USA. E-mail: [email protected]
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Abstract

This paper studies the intergenerational welfare effects of climate change and a control policy within a decentralized overlapping generations framework, including endogenous abatement activities. The model incorporates a profit stimulated R&D with realistic market distortions to create an induced innovation structure. In this setting, a control policy has the dual role of discouraging emissions and triggering new abatement technologies. The results from numerical simulations show that the omission of entrepreneurial response to a control policy is likely to result in overestimation of costs associated with this particular policy. Although induced innovation has the potential to reduce the compliance costs with the control policy, current and near-future generations will bear some net costs. The higher the damage projected from climate change, the earlier the net benefit will arrive.

Type
Research Article
Information
Environment and Development Economics , Volume 12 , Issue 2 , April 2007 , pp. 183 - 211
Copyright
© 2007 Cambridge University Press

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Footnotes

First and foremost I would like to thank Shawn D. Knabb for his collaboration on Kavuncu and Knabb (2005) from which this paper highly benefits and for personal communications with him on this paper as well. I am also grateful to Henning Bohn, Stephen J. DeCanio, and John M. Marshall for their careful review and suggestions. Two referees provided constructive suggestions. Of course, all remaining errors are my own.