Restricted carbon emissions and directed R&D support; an applied general equilibrium analysis

We analyse welfare effects of supporting general versus emission-saving technological development when carbon emissions are regulated by a carbon tax. We use a computable general equilibrium model with induced technological change (ITC). ITC is driven by two separate, economically motivated research and development (R&D) activities, one general and one emission-saving specified as carbon capture and storage (CCS). We study public revenue neutral policy alternatives targeted towards general R&D and CCS R&D. Support to general R&D is the welfare superior. However, the welfare gap between the two R&D policy alternatives is reduced with higher carbon tax levels. For sufficiently high levels of the carbon tax equal subsidy rates are preferred. ► Support to general versus emission-saving technological development influence welfare. ► Induced technological change is driven by general and emission saving R&D. ► Support for general R&D is welfare superior. ► The welfare gap between the R&D policy alternatives falls with higher carbon tax. ► For sufficiently high levels of the carbon tax, equal subsidy rates are preferred.