This paper analyses optimal investments in innovation when dealing with a stringent climate target and with the uncertain effectiveness of R&D. The innovation needed to achieve the deep cut in emissions is modelled by a backstop carbon-free technology whose cost depends on R&D investments. To better represent the process of technological progress, we assume that R&D effectiveness is uncertain. By means of a simple analytical model, we show how accounting for the uncertainty that characterizes technological advancement yields higher investments in innovation and lower policy costs. We then confirm the results via a numerical analysis performed with a stochastic version of WITCH, an energy-economy-climate model. The results stress the importance of a correct specification of the technological change process in economy-climate models.

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Suggested citation: Valentina Bosetti, Massimo Tavoni, Uncertain R&D, backstop technology and GHGs stabilization, Energy Economics, Volume 31, Supplement 1, 2009, Pages S18-S26, ISSN 0140-9883, http://dx.doi.org/10.1016/j.eneco.2008.03.002