Accounting for quality: Issues with modeling the impact of R&D on economic growth and carbon emissions in developing economies

The literature on climate policy modeling has paid scant attention to the important role that R&D is already playing in industrializing countries such as China, where R&D investments are targeting not only productivity improvements but also enhancements in the quality and variety of products. We focus here on the effects of quality-enhancing innovation on energy use and GHG emissions in developing countries. We construct an analytical model to show that efficiency-improving and quality-enhancing R&D have opposing influences on energy and emission intensities, with the efficiency-improving R&D having an attenuating effect and quality-enhancing R&D having an amplifying effect. We find that the balance of these opposing forces depends on the elasticity of upstream output with respect to efficiency-improving R&D, the elasticity of downstream output with respect to upstream quality-enhancing R&D occurring upstream, and the relative shares of emissions-intensive inputs in the costs of production of upstream versus downstream industries. We employ a computable general equilibrium (CGE) simulation of the Chinese economy to illustrate the difficulties that arise in incorporating these results into models for climate policy analysis, and we offer a simple remedy.