A note on the induced effects of carbon prices and R&D subsidies in carbon-free technologies

Abstract

This note focuses on two types of distortions that can prevent the market from functioning optimally. The first results from CO2 emissions generated by the consumption of fossil fuels. The second is related to R&D activities, since innovators are generally incapable of securing the totality of the benefits created by their innovations. Two types of instruments can be used in order to correct for these externalities: a carbon price on the one hand, and research subsidies on the other hand. These instruments tend to interact in a complex manner when the economy is in equilibrium. The paper first recalls the basic economic principles which govern the correction of environmental and research externalities and describes four endogenous growth models that provide information about the interaction between related public policies. Although they differ in the ways how innovation, production, the climate and damages have been taken into account, all of them reach the following consensual result: the beneficial effect of the carbon price is reinforced by the simultaneous implementation of R&D subsidies in favour of carbon-free energies and vice-versa. Furthermore, early action is necessary in order to reduce the social costs of climate change mitigation.