Endogenous Innovation, the Economy and the Environment: Impacts of a Technology-Based Modelling Approach for Energy-Intensive Industries in Germany

Abstract

This paper presents policy simulation results from a new modelling approach for three energy-intensive industry sectors in Germany. In this approach, technological change is explicitly portrayed and linked to actual production processes. Likewise, technology choice is modelled via investments in new production process lines. The new modelling approach is integrated into the macro-econometric model PANTA RHEI. By endogenizing technological change it also takes into account that policy interventions may affect the rate and direction of technological progress. The implications of the new modelling approach are highlighted by simulating the effects of a CO2 tax in the new approach and in the conventional approach. For the energy- and capital-intensive industries considered, our results show that the conventional top-down approach overestimates the short-term possibilities to adapt to higher CO2, prices in the early years. By including policy-induced technological change and process shifts, the new approach also captures the long-term effects on CO2, emissions well beyond the initial price impulse. In the long run, the estimated costs are found to be smaller under the new approach. [ABSTRACT FROM AUTHOR]