Induced Technical Change in Energy and Environmental Modeling: Analytic Approaches and Policy Implications

▪ Abstract Technical change in the energy sector is central for addressing long-term environmental issues, including climate change. Most models of energy, economy, and the environment (E3 models) use exogenous assumptions for this. This is an important weakness. We show that there is strong evidence that technical change in the energy sector is to an important degree induced by market circumstances and expectations and, by implication, by environmental policies such as CO2 abatement. We classify the main approaches to modeling such induced technical change and review results with particular reference to climate change. Among models with learning by doing, weak responses are only obtained from models that are highly aggregated (lack technological diversity) and/or that equate rates of return to innovation across sectors. Induced technical change broadens the scope of efficient policies toward mitigation, including not just research and development and aggregated market instruments but a range of sectoral-...

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