An innovation and climate policy model with factor-biased technological change : a small, open economy approach

Abstract

This report documents the model structure and empirical implementation procedures of a dynamic computable general equilibrium (CGE) model that includes induced technological change (ITC). The model is developed for analyses of economy-wide welfare and growth impacts of innovation and greenhouse gas abatement policy. It accounts for macroeconomic productivity and productivity growth effects in an realistic economic and political setting, where several simultaneous reallocations take place and interact with each other. ITC is driven by two separate, economically motivated research and development (R&D) activities. These activities result in new technological solutions that increase the productivity of capital. The first activity develops general patents, while the second is directed towards environmental technological solutions, specified as carbon capture and storage (CCS). These activities result in new technological solutions that increase the productivity of capital. In addition, R&D of one firm increases the productivity of concurrent and future R&D firms, as it contributes to the common knowledge stock of the country. Emissions of the six Kyoto greenhouse gases are modeled in detail. The model describes the Norwegian economy and is designed to address policy challenges of small, open countries, where changes in international trade and competitiveness are crucial for the results of policies, and where knowledge spillovers from abroad dominate the technological development.