22.214.171.124 Empirical Analyses
of the relative effects of alternative environmental policy instruments on the
rate and direction of technological change are limited in number, but those
available focus on technological change in energy efficiency, and thus are potentially
of direct relevance to global climate policy. These studies can be considered
within the three stages of technological change introduced aboveinvention,
innovation, and diffusion. It is most illuminating, however, to consider the
three stages in reverse order.
Beginning, then, with empirical analyses of the effects of environmental policy
instruments on technology diffusion, Jaffe and Stavins (1995) conducted econometric
analyses of the factors that affected the adoption of thermal insulation technologies
in new residential construction in the USA from 1979 to 1988. They examined
the dynamic effects of energy prices and technology adoption costs on average
residential energy-efficient technologies in new home construction. The effects
of energy prices can be interpreted as suggesting what the likely effects of
taxes on energy use would be, and the effects of changes in adoption costs can
be interpreted as indicating what the effects of technology-adoption subsidies
would be. They found that the response of mean energy efficiency to energy price
changes was positive and significant, both statistically and economically. Interestingly,
they also found that equivalent percentage cost subsidies would have been about
three times as effective as taxes in encouraging adoption, although standard
financial analysis suggest they ought to be about equal in percentage terms.
This finding does, however, offer confirmation for the conventional wisdom that
technology adoption decisions are more sensitive to up-front cost considerations
than to longer-term operating expenses.
In a study of residential conservation investment tax credits, Hassett and
Metcalf (1995) also found that tax credit or deductions were many times more
effective than equivalent changes in energy pricesabout eight
times as effective in their study. They speculate that one reason for this difference
is that energy price movements may be perceived as temporary. The findings by
Jaffe and Stavins (1995), and by Hasset and Metcalf (1995) are consistent with
other analyses of the relative effectiveness of energy prices and technology
market reforms in bringing about the adoption of lifecycle cost-saving technologies.
Up-front subsidies can be more effective than energy price signals (see, e.g.,
Krause et al., 1993; Howarth and Winslow, 1994; IPSEP, 1995; Eto et al., 1996;
Golove and Eto, 1995; IPCC, 1996, Executive Summary, p. 13). A disadvantage
of such non-price policies relative to administered prices is that they have
to be implemented on an end-use by end-use or sector by sector
basis in a customized fashion. Also, an effective institutional and regulatory
framework needs to be created and maintained to evaluate and ensure the continued
cost-effectiveness of such policies.
This and other research on energy efficiency programmes also highlights a major
difference in the way energy price signals and technology subsidies function.
The technology adoption response to taxes may include a secondary increase in
the demand for energy services. This secondary effect takes two forms: a direct
effect that results from the increased utilization of energy-using equipment
and capital stocks, and an indirect effect from increased disposable income.
Studies of such demand effects suggest that the combined effects are generally
not sufficient to offset more than a minor portion of emissions reductions.
In addition, technology subsidies and tax credits can require large public
expenditures per unit of effect, since consumers who would have purchased the
product even in the absence of the subsidy will still receive it.110
Some recent empirical studies suggest that the response of relevant technological
change to energy price changes can be surprisingly swift. Typically, this is
less than 5 years for much of the response in terms of patenting activity and
the introduction of new model offerings (Jaffe and Stavins, 1995; Newell et al., 1999; Poppe, 1999). Substantial diffusion can sometimes take longer, depending
on the rate of retirement of previously installed equipment. The longevity of
much energy-using equipment reinforces the importance of taking a longer-term
view towards energy-efficiency improvementson the order of decades.
An optimal set of policies would be designed in such a way as to achieve two
outcomes simultaneously: release any obstructed emission and cost-reduction
potentials from already available technologies through various market reforms
that try to reduce market distortions (see IPCC, 2000), and induce the accelerated
development of new technologies. This approach allows significant carbon abatement
over the near-term by diffusing existing technologies, while at the same time
preparing new technologies for the longer term.