Chapter 8

Modeling Induced Innovation inClimate-Change Policy

William D. Nordhaus

8.1   Introduction

Studies of environmental and climate-change policy—indeed of virtually all aspects of economic policy—have generally sidestepped the thorny issue of induced innovation, which refers to the impact of economic activity and policy on research, development, and the diffusion of new technologies. This omission arises both because of the lack of a firm empirical understanding of the determinants of technological change and because of the inherent difficulties of economic modeling processes with externalities and increasing returns to scale. While we suspect that we know the direction of this effect—toward overestimates of the cost of emissions reductions ...

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