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Abstract

We develop a dynamic general equilibrium integrated assessment model that incorporates costs due to new technology adoption in renewable energy as well as externalities associated with carbon emissions and renewable technology spillovers. We use world economy data to calibrate our model and investigate the effects of the technology adoption channel on renewable energy adoption and on the optimal energy transition. The calibrated model implies several interesting connections between technology adoption costs, the two externalities, and welfare. We investigate the relative effectiveness of two policy instruments — Pigouvian carbon taxes and policies that internalize spillover effects — in isolation as well as in tandem. Our findings suggest that renewable technology adoption costs are of quantitative importance for the energy transition. We find that the two policy instruments are better thought of as complements rather than substitutes.

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