Cost containment in climate policy and incentives for technology development

Abstract

Safety valves, discretionary advisory boards, and other cost containment mechanisms enhance the political feasibility of stringent climate policy by limiting firms' and households' exposures to higher than anticipated costs associated with reducing greenhouse-gas emissions. However, cost containment comes at a price; it increases the risk of climate-related damages and simultaneously discourages invest- ments to develop low-carbon technologies. A stylized model of the cost of climate policy is used to estimate that proposed cost containment mechanisms will increase emissions by 11-70% by 2030. Because these clauses limit the payoffs to innovation, they reduce our societal capacity to affordably mitigate climate change through technology improvement. If cost containment measures are to be employed at levels discussed in recent policy debates, then complementary policies to fund technology development will be needed; crucially, the two also need to be linked. One way to resolve the impasse between increased climatic damages and reduced incentives for innovation is to create a technology development fund with contributions indexed to the amount by which the market price for carbon exceeds the price cap.