International fora on climate change expect technological innovation to be one of the major contributors to the reduction of greenhouse gas emissions. Through technological innovation in energy intensive production sectors, the costs of compliance with the requirements set by climate policies may be significantly reduced.

The other way around, one may wonder which conditions technological change in the energy sectors should fulfil in order to accomplish certain emission objectives. Increased emissions cause an increase in mean global temperature which is a major cause for the changes in mortality and birth rates, and it increases health risks. This paper considers an objective of limiting the rise in mean global temperature to one degree Celcius in 2050 compared to 1992. We refer to this objective as the temperature objective.

The integrated assessment model WIAGEM explains energy productivity in a production sector as determined by the sector’s outlays on research and development in the recent past. The impact of investments in research and development on energy productivity depends on an efficiency parameter and an elasticity parameter. A relatively high value of the efficiency parameter yields a relatively high impact of research and development investments on energy productivity. A percentual increase in the costs of research and development results in an increase in energy productivity with the value of the elasticity parameter. A relatively high value of the elasticity parameter indicates a relatively quick implementation of the new technologies that result from increased investments in research and development. We could interpret the elasticity parameter as an indication for a learning effect. A relatively high value of the elasticity parameter indicates a relatively high learning capacity in the production sector.

This paper investigates technological innovation in the European Union. The efficiency parameter and elasticity parameter are calibrated in such a way that the temperature objective is met. We define two counterfactual scenarios. One scenario limits technological innovation to the developed regions where the value of the efficiency parameters in these regions are determined such that the temperature objective is met. We expect the values obtained for these efficiency parameters to be relatively high in order to prevent an excessive increase in the costs of research and development investments. Another scenario extends this scenario to the incorporation of the developing world where the elasticity parameter in these regions are determined such that the temperature objective is met. The latter scenario offers the developed regions with an option to achieve their emission reduction objectives in a more cost-effective way, namely through the export of their cleaner technologies to the developing world. The adjustment in the elasticity parameter for the developing regions indicates a change in learning capacity that can for example be caused by the import of more efficient technologies from the developed world.

We use the ’World Integrated Assessment General Equilibrium Model’ (WIAGEM) which combines an economic general equilibrium model based on the MultiSector-MultiRegional-Trade (MS-MRT) model with a climate model and a damage assessment model. WIAGEM applies a regional resolution of 11 regions, among others the EU, and 14 production sectors comprising the four energy sectors coal, oil, gas, and petroleum. WIAGEM is an intertemporal recursive dynamic general equilibrium model with a time horizon. The time span is from 1995 until 2050 in time steps of 5 years. The model is calibrated on the GTAP4 database with extensions on energy data from the International Energy Agency.