Optimal climate policy under exogenous and endogenous technical change: making sense of the different approaches

Coppens, Léo, Dietz, Simon ORCID: 0000-0001-5002-018X and Venmans, Frank ORCID: 0000-0002-4264-6606 (2025) Optimal climate policy under exogenous and endogenous technical change: making sense of the different approaches. Grantham Research Institute on Climate Change and the Environment Working Papers (408). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.

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Abstract

We analyse the large and diverse literature on technical change in integrated assessment models (IAMs) of climate change, with a view to understanding how different representations of technical change affect optimal climate policy. We first solve an analytical IAM that features several models of technical change from the literature, including exogenous technical change in abatement technologies, exogenous decarbonisation of the economy, endogenous technical change via learning-by-doing, and endogenous technical change via R&D (in particular, directed technical change). We show how these models of technical change impact optimal carbon prices, emissions and temperatures in often quite different ways. We then survey how technical change is currently represented in the main quantitative IAMs used to inform policy, demonstrating that a range of approaches are used. Exogenous technical change in abatement technologies and learning-by-doing are most popular, although the latter mechanism is only partially endogenous in some models. We go on to quantify technical change in these policy models using structural estimation, and simulate our analytical IAM numerically assessing the effect of technical change on optimal climate policy. We find large quantitative effects of technical change and large quantitative differences between different representations of technical change, both under cost-benefit and cost-effectiveness objectives.

Item Type:	Monograph (Working Paper)
Official URL:	https://www.lse.ac.uk/granthaminstitute/publicatio...
Additional Information:	© 2024 The Author(s)
Divisions:	Geography and Environment Grantham Research Institute
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HB Economic Theory T Technology > TD Environmental technology. Sanitary engineering
JEL classification:	C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C61 - Optimization Techniques; Programming Models; Dynamic Analysis O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O30 - General Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate; Natural Disasters Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q55 - Technological Innovation Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy
Date Deposited:	15 Aug 2024 12:45
Last Modified:	23 Jun 2025 14:48
URI:	http://eprints.lse.ac.uk/id/eprint/124548

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