The economics of changing course: Implications of adaptability and inertia for optimal climate policy

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 opti...

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Bibliographic Details
Published in:Energy policy 1995-04, Vol.23 (4), p.417-431
Main Authors: Grubb, Michael, Chapuis, Thierry, Duong, Minh Ha
Format: Article
Language:English
Subjects:
Adaptation
Adaptive responses
Applied sciences
Climate
Climate policy
Economic models
Economics
Economics and Finance
Energy
Energy economics
Energy policy
Environmental economics
Environmental policy
Exact sciences and technology
General, economic and professional studies
Global warming
Greenhouse effect
Humanities and Social Sciences
Pollution control costs
Public policy
Studies
Technological change
Technology
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Summary: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 CO 2 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.
ISSN:0301-4215
1873-6777
DOI:10.1016/0301-4215(95)90167-6