Generational welfare under a climate-change policy with induced innovation

We develop a climate-economy model with generational heterogeneity and the potential for climate-policy-induced technological change. We use the model to assess the distributional implications of climate policies and of policy designs which recycle generated revenues to finance research and development (R&D). We model only innovation in the energy generated per unit of fossil fuels, so the quantitative results we derive are small. Our emphasis is on the distributional impacts of redistributing climate policy rents to enhance R&D. We show that while investments of climate policy rents to accelerate innovation are likely to be welfare improving as long as significant market failures exist, they are also likely to exacerbate the distributional inequities created across generations by climate change policies. The political feasibility of climate policies may be harmed by rent transfers to R&D as these transfers can increase the costs borne by agents alive today, while increasing benefits to generations born far into the future