Global warming, uncertainty and endogenous technical change

Abstract

What impact does ecological uncertainty have on agents' decisions concerning domestic emissions abatement, physical investments, and R&D expenditures? How sensitive are the answers to these questions when we move from exogenous to endogenous technical change? To investigate these issues we modify the ETC-RICE model described in Buonanno et al. (2001) by embedding in it a hazard rate function as in Bosello and Moretto (1999). With this model at hand we run numerical optimisations focusing our attention on the control variables of the representative agents, i.e., domestic abatement rate, investments in physical capital, and R&D spending, as well as on the endogenous patterns of GDP level and CO2 emissions. Our results show that uncertainty strongly influences agents behaviour; in particular, agents slow down their emissions in order to maintain a more sustainable growth path. In addition, R&D expenditures trigger the "engine of growth" exclusively when environmental technical change is formalized in an endogenous fashion. However, even if environmental uncertainty may stimulate technical change, long-run growth it turns out to be negatively affected by the former, as also predicted by Clarke and Reed (1994) Tsur and Zemel (1996) and Bosello and Moretto (1999). © 2003 Kluwer Academic Publishers.