Study shows how more R&D funding can accelerate the world energy revolution

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"Most people know we are frying the planet," says MIT economist Daron Acemoglu, referring to the effects of climate change.

After all, 2015 was the hottest year on record, portending drastic long-term problems involving agriculture, rising sea levels, drought, and much more. "What is probably less clear is how to resolve that," Acemoglu adds.

On one level, we know the answer: Replace carbon-emitting fossil fuels with clean energy, including solar and wind power. To do this, many economists recommend a carbon tax. A smaller number of experts also endorse more government funding for research and development (R&D) in clean energy. In theory, both measures should make clean energy more economically competitive with oil, gas, and coal.

But to what extent would those policies influence the transition from dirty energy to clean energy? In a newly published paper, Acemoglu and three colleagues present a uniquely detailed model of the dynamics of innovation in the energy industry. In so doing, they indicate how supporting clean energy R&D, not just a carbon tax, might be the best way to help clean energy technologies compete with traditional forms of energy.

"We propose that you use the carbon tax in moderation and use research subsidies for clean technology in order to make that transition faster," says Acemoglu, the Elizabeth and James Killian Professor of Economics at MIT. And on the R&D front, he adds, "The optimal policy is front-loaded intervention right away."

Indeed, the model indicates that an ideal policy would feature both a high initial level of R&D subsidies, which would drop to nearly zero after 50 years, and a carbon tax that increases over a roughly 130-year period before dropping off. A crucial mechanism at work is that the high R&D subsidy allows for a quicker transition to clean energy while not slowing down economic growth, as a carbon tax alone would.

"Clean technologies allow you to bypass the growth-retarding implications of a carbon tax," Acemoglu explains.

And given that the effects of climate change will have heavy social costs, the scholars also estimate the costs of not implementing this kind of two-front policy. Delaying what they believe is the optimal policy by 50 years, the researchers estimate, would have a social welfare cost equivalent to a perpetual 1.7 percent drop in annual consumption, from today forward. And relying only on a carbon tax, with no R&D subsidies in the mix, would be equivalent to a 1.9 percent annual drop in consumption.

The federal budget for the 2016 fiscal year included about $6.4 billion in clean energy research funding; the White House has proposed doubling that by the 2021 fiscal year.

The paper detailing the research, "Transition to Clean Technology," is published in the latest issue of the Journal of Political Economy. In addition to Acemoglu, the co-authors are Ufuk Akcigit of the University of Pennsylvania, Douglas Hanley of the University of Pittsburgh, and William Kerr of Harvard University.