This paper studies the cost effectiveness of combining traditional environmental policy, such as CO2 trading schemes, and technology policy that has aims of reducing the cost and speeding the adoption of CO2 abatement technology. For this purpose, we develop a dynamic general equilibrium model that captures empirical links between CO2 emissions associated with energy use, directed technical change and the economy. We specify CO2 capture and storage (CCS) as a discrete CO2 abatement technology. We find that combining CO2-trading schemes with an adoption subsidy is the most effective instrument to induce adoption of the CCS technology. Such a subsidy directly improves the competitiveness of the CCS technology by compensating for its markup over the cost of conventional electricity. Yet, introducing R&D subsidies throughout the entire economy leads to faster adoption of the CCS technology as well and in addition can be cost effective in achieving the abatement target.

© 2008 Elsevier B.V.