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The economics of changing course

Implications of adaptability and inertia for optimal climate policy

Michael Grubb
Energy and Environmental Programme, Royal Institute of International Affairs, 10 St James's Square, London SW1Y 4LE, UK

Thierry Chapuis and Minh Ha Duong
Centre International de Recherche sur l'Environnement et le Developpement (CIRED-CNRS) 1 rue du 11 Novembre, 92120 Montrouge, France

This paper reviews evidence that energy technologies and systems adapt over time to accommodate external pressures: that technical innovation and systemic change in the energy sector is largely induced by need, and restrained by potentially large transitional costs. A simple integrated model of optimal greenhouse gas abatement over time is presented, in which the abatement cost depends on both fixed and transitional elements. It is shown that the optimal current response and long-run prospects differ radically between the classical economic case in which the cost of a given cutback in emissions is fixed exogenously - and the adaptive case in which the response is ultimately adaptive but heavily constrained by inertia (ie low fixed but high transitional cost). If energy systems are indeed to a large degree adaptive, the results demonstrate that as compared with the classical non-adaptive case: long-run stabilization of atmospheric CO2 may be optimal even with moderate damages from climate change; greater near-term abatement efforts are justified; and the cost of a given delay in response may be several times higher. Neglect of the issue of induced technical change and other adaptive responses may invalidate the policy implications drawn from most integrated assessment models developed to date.

Keywords: Climate policy; Technological change: Adaptive responses

 

 

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