Modeling Climate Policy Instruments in a Stackelberg Game with ...

14 2 METHODS AND ECONOMIC THEORY
ρ+θĈ. Nevertheless, these approaches of using exogenous technological change
lack for an understanding and explaining of the forces and determinants of
economic growth.
Romer (1986) introduced the concept of knowledge creation as a side product
of investments: Firm’s individual capital stock cause positive externalities in
form of spillover effects for the entire sector. This form of modeling endogenous
technological change (ETC) is called learning-by-investing or learning-by-doing
(LbD) (Barro and i Martin, 1999, p. 146).
Alternatively, expenditures in research and development (R&D) generate
endogenous technological change. While the pristine modeling approach with
micro-foundation was introduced by Romer (1990), several modifications by
Jones (1995) to eliminate scale-effects of the Romer model and finally for climateeconomic
modeling by Popp (2004, 2006a,b) lead to a more elementary mathematical
description. Because of missing micro-foundation due to simplifications,
R&D expenditures are public (paid by the government) and hence unfortunately
cannot capture microeconomic considerations in private R&D efforts by firms
(otherwise Zagler and Dürnecker (2003) and Greiner et al. (2005, Sec. 2.4)
emphasize the meaning of public expenditures for economic growth).
However, both concepts – learning-by-doing and R&D expenditures – contribute
to technological change and economic growth. Greiner et al. (2005) for
example state with regard to time series analysis that learning-by-doing effect
dominates in economies on a low stage of economic development, while R&D
expenditures and other growth forces dominate in highly developed economies.
Market failures in technology markets occur due to two crucial properties of
knowledge and innovation. The first refers to the very limited excludability of
invented knowledge to competing firms, the second to the great uncertainties
affected with research and their utilizable and profitable outcome. A third
market failure can be seen in the slow diffusion of technological innovations,
because firms and consumers do not know them or because they are not flexible
enough in changing their consumption behavior.
For each of these failures there exist several policy instruments: Vollebergh
and Kemfert (2005) emphasize the importance of a (temporal) monopoly position
of the inventor, e.g. by holding a patent to exclude competitors to imitate
their invention. Another common instrument is a capital subsidy for innovative
investments that covers sectoral spillover-effects and hence aligns private and
social rate of return. Jaffe et al. (2005) suggest beside capital subsidies several
governmental activities like basic research programs, general education improvements,
public-private-partnerships and public R&D expenditures to stimulate
innovative technological change. On the demand side government can facilitate
market entry and market share of new technologies by own consumption
changes. However, technology distribution should always be technology-neutral
– i.e. orientated on political targets (like emission standards) and not on a particular
technical implementation – to avoid encouragement of technologies that
are already outdated by (existing or potential) new ones. Hence, Jaffe et al.
(2005) also mention the importance of information policies, energy standards
and labels to change possible inertial consumption behavior of consumers.
In the context of global warming the question of interference with environmental
policy emerges. How does technological change influence emission
taxes and the timing of abatement? Several studies indicate, that endogenous
technological change postpones abatement efforts in favor of overall productivity
growth in near-term future (e.g. Grübler and Messner, 1998; Goulder and