Comments and Questions

I am grateful to the referee for his/her perceptive comments. She/he asks several questions. Let me respond to these. What exactly does it mean to focus more on R&D? Even if Kyoto, or a new treaty styled after Kyoto, were to raise the cost of emitting greenhouse gases, there would be too little innovation for the simple reason that patent protection does not extend to basic knowledge. There must be public support for R&D (just as, in the U.S., the National Institutes for Health finance medical research that is used as an input to pharmaceutical development). Of course, Kyoto also fails to provide the “right” price signal. In addition, Kyoto only limits emissions for five years (if we think a patent needs to be 20 years long to stimulate, say, vaccine research, why do we think five years is long enough for technologies that can mitigate climate change?). A focus on R&D would include direct funding of R&D and associated measures that raise the price of emitting greenhouse gases, now and well into the future. What types of new technology seems most likely to succeed? I think we do not know the answer to this question, which is precisely why more basic research is needed. Let me, however, make some observations. First, it seems very clear that we need to understand the potential for and the risks associated with plant-level, carbon capture and storage. It is truly remarkable that no large-scale demonstration plant of this kind is up and running anywhere in the world. Other technologies deserving increased attention include space solar power, industrial air capture, and geoengineering. For the automobile, I think the case for electric powered cars (where the power, obviously, must be produced using carbon-free energy) is likely to be very strong, making R&D into battery technologies very important. I want to stress, however, that our R&D efforts need to be very broad. Does cooperation over R&D raise some of the same free rider issues as Kyoto type emission limits? An article of mine published in 2006 (“Climate Treaties and ‘Breakthrough’ Technologies,” American Economic Review Papers and Proceedings), and cited in the paper reviewed by this referee, addresses this question. If the value of the R&D depends entirely on whether the knowledge derived from the R&D is embodied in technologies that are actually used to reduce emissions, then free riding in reducing emissions will cause there to be free riding in R&D financing. This, I believe, explains why there has been quite a lot of R&D into nuclear fusion (the ITER), which promises benefits unrelated to climate change mitigation, but very little so far on carbon capture and storage, which only benefits climate change mitigation. It is for this reason that I argue in this paper that R&D should be strategic. R&D funding must be linked to the prospects for diffusion leading to reductions in greenhouse gas emissions. What are the incentives for individual countries to implement technology standards if this increases costs (e.g., CCS, which…will always be an extra cost)? This is an excellent question, and a hard one to answer. A necessary condition for us to succeed in addressing climate change is the belief that we will benefit from avoiding climate change. If each country ‘s benefit were huge relative to the cost of plant-level carbon capture and storage (CCS), then free riding would not be a problem. Obviously, however, free riding is a problem. So the question is, how can we get around the free rider problem by using something like a CCS standard? Let me speculate. Suppose that CCS represented a normative and not only a technical standard. That is, suppose a norm emerged that said that countries have a responsibility not to burn coal; or, if they do burn coal, to use CCS. We know that willingness to abide by a norm often depends on whether others obey the norm. So an agreement might be helpful to indicate that each of a certain set of countries ought to use CCS provided enough other countries in this set use CCS. This contingent promise would help countries get around the free rider problem (by increasing the benefit to each country of adopting CCS) and to reinforce the norm. For an analytical paper on this kind of behavior, see M. Hoel and K. Schnieder (1997), “Incentives to Participate in an International Environmental Agreement.” Environmental and Resource Economics, 9: 153-170. I agree with the referee that these are difficult questions. I also agree that these questions deserve to be raised. We may not know all the answers today, but I can’t see how we will be able to address this great challenge unless we try to answer them.