Global warming and technical change: Multiple steady-states and policy options

We develop an economic growth model that incorporates anthropogenic climate change and a publicly funded research sector that creates new technologies and simultaneously expands the productivities of existing technologies. Greenhouse gas emissions are affected by R&D activities both negatively, through the increase of output from productivity growth, and positively as new technologies are less polluting. We find that there may exist two different steady-states of the economy, depending on the amount of research spending: one with less new technologies being developed and the other with more technologies. Thus, a lock-in effect can arise that, however, can be overcome by raising R&D spending sufficiently such that the steady-state becomes unique. We derive the combinations of fiscal policy instruments for which that can be achieved and we study the implications for the economy and with respect to emissions. In particular, the double dividend hypothesis may hold under some specific conditions.