Conference Agenda

With the US Inflation Reduction Act (IRA) and the European response of the Green Industrial Plan, the role of green R&D support in the climate policy mix is receiving renewed interest, can R&D support replace politically unfeasible carbon pricing and reduce emissions? Can it improve the competitiveness of domestic industries, e.g. by lowering production prices? We argue that the contribution of R&D support strongly depends on the accompanying carbon pricing policy, which can be either non-existent (as at the US national level), an emissions trading scheme (as for EU industry), or an emission tax (as currently applied in many EU non-industrial sectors). To show how these carbon pricing policies affect the impact of R&D support, we set up a stylized formal model and derive analytical results. We find that R&D support is part of an optimal policy mix in combination with an environmental policy. We find that an increase in the R&D subsidy induces a shift from dirty towards clean production, leading to an overall increase in supply and increasing cost-competitiveness. Environmental gains through emission reductions only exist with no climate policy or an emission tax, but unsurprisingly not under an emissions trading system where emissions are fixed. Calibrating the model to the EU electricity sector, we find the same signs but only minute effect sizes for output production, output prices, emissions or emissions prices, and welfare. In line with the theory, R&D subsidies are exclusively effective in encouraging patenting. Furthermore, R&D subsidies interact positively with environmental policies, thus an increase is more effective in the presence of a climate policy than its absence.