Endogenous Innovation, the Economy and the Environment: Impacts of a Technology-Based Modelling Approach for Energy-Intensive Industries in Germany

This paper presents policy simulation results from a new modelling approach for three energy-intensive industry sectors in Germany. In this approach, technological change is explicitly portrayed and linked to actual production processes. Likewise, technology choice is modelled via investments in new production process lines. The new modelling approach is integrated into the macro-econometric model PANTA RHEI. By endogenizing technological change it also takes into account that policy interventions may affect the rate and direction of technological progress. The implications of me new modelling approach are highlighted by simulating me effects of a CO, tax in me new approach and in the conventional approach. For me energy- and capital-intensive industries considered, our results show that the conventional top-down approach overestimates me short-term possibilities to adapt to higher CO, prices in me early years. By including policy-induced technological change and process shifts, me new approach also captures me long-term effects on CO, emissions well beyond the initial price impulse. In me long tun, me estimated costs are found to be smaller under me new approach.