Report on the assessment of prospective policies

The ENTRACTE research project is aiming to analyse the European climate policy portfolio with special emphasis on the role of interactions between its different parts. The project’s ultimate goal is to provide pragmatic guidance to policy makers for designing effective, cost efficient and politically and legally feasible climate policy portfolios.

This report describes how prospective climate change policies need to take into account the role of innovation incentives. First, the role of innovation prizes is studied. It is found that for innovations that affect a large segment of emissions (e.g. from the electricity sector or transportation), innovation prizes may be an important policy instrument. Second, policy instrument choice in the presence of directed technical change is studied. Reaching an appropriate cumulative emissions target is least costly if a combination of a carbon tax and an R&D subsidy for renewables can be employed. If only the R&D subsidy is used or only a renewables subsidy, costs are substantially higher and a faster transition comes at the cost of lower productivity growth.

Authors: Sjak Smulders, Mads Greaker