Revisiting the mechanism of endogenous technical change for climate policy analysis

Abstract

Numerous climate policy modeling studies that feature endogenous technical change (TC) have emerged in the literature, but their endogenous specifications tend to diverge with little consensus on the underlying process. To reconcile disparate modeling methods, this paper revisits the mechanism of endogenous TC in climate policy analysis by developing a conceptual framework that captures three endogenous processes: R&D inducement, knowledge creation, and production technical change. I also provide methodological implications on how to incorporate this mechanism into a multi-sector computable general equilibrium (CGE) model, particularly the treatment on cross-sector knowledge spillovers and R&D crowding-out. Building on this generalized framework, climate policy modeling that seeks to incorporate endogenous TC can hopefully be supported in future studies.