This paper analyzes the requirements for a social welfare-optimized transition path toward a carbon-free economy, focusing particularly on the role of R&D and other technological measures to achieve timely supply-side transformations in the global production regime that will avert catastrophic climate instability. We construct a heuristic integrated model of macroeconomic growth constrained by geophysical system with climate feedbacks, including extreme weather damages from global warming driven by greenhouse gas emissions, and ‘tipping point’ for catastrophic runaway warming. A variety of options for technology development and implementation, each having a distinctive primary functionality CO2 emissions control, and the dynamic relationships and interactions among them are examined. The specifications recognize (i) the endogeneity and embodiment of technical innovations, and (ii) the irreversibility and long gestation periods of required intangible (R&D) and tangible capital formation. Efficient exercise of these options is shown to involve sequencing different investment and production activities in separate temporal “phases” that together form a transition path to a carbon free economy. To study the requirements of a timely (catastrophe-averting) transition, we formulate a sequence of optimal control sub-problems linked together by transversality conditions, the solution of which determines the optimum allocation of resources and sequencing of the several phases implied by the options under consideration. Ours is “planning-model” approach, which departs from conventional IAM exercises by eschewing assumptions about the behaviors of economic and political actors in response to market incentives and specific public policy measures. Solutions for each of several multi-phase models yields the optimal phase durations and rates of investment and production that characterize the transition path. Sensitivity experiments with parameters of economic and geophysical sub-systems provide insights into the robustness of the requirements analysis under variations in the technical and geophysical system parameters.
This paper has been superceded by the revised version: SIEPR Discussion Paper #13-039