This paper illustrates the representation of induced technological change in the multi-regional, multi-sectoral integrated assessment model WIAGEM. The main aim of the paper is to investigate quantitatively the economic impacts of climate policy measures due to the induced technological changes that are considered. Improved technological innovations are triggered by increased R&D expenditures that advance energy efficiency. Model results show that induced technological changes due to increased investment in R&D reduce compliance costs. Although R&D expenditures compete with other investment expenditures, we find that increased R&D expenditures improve energy efficiency which substantially lowers abatement costs. Without the inclusion of induced technological changes, emission targets are primarily reached by declines in production, resulting in overall welfare reductions. With the inclusion of induced technological changes, emission mitigations can be achieved with fewer production drawbacks. Technological spillover effects also lead to improved terms-of-trade effects.
Keywords: Induced technological change, Multi-regional applied integrated assessment model, Technological spillover