The need for a better understanding of future energy scenarios, of their compatibility with the objective of stabilizing greenhouse gas concentrations, and of their links with climate policy, calls for the development of hybrid models. Hybrid because both the technological detail typical of Bottom Up (BU) models and the long run dynamics typical of Top Down (TD) models are crucially necessary. We present WITCH-World Induced Technical Change Hybrid model-a neoclassical optimal growth model (TD) with energy input detail (BU). The model endogenously accounts for technological progress, both through learning curves affecting prices of new vintages of capital and through R&D investments. In addition, the model captures the main economic interrelationships between world regions and is designed to analyze the optimal economic and environment policies in each world region as the outcome of a dynamic game. This paper provides a detailed description of the WITCH model, of its baseline, and of the model calibration procedure.

It is now widely recognized that technological change will play a substantial role in reducing GHG emissions without compromising economic growth; hence, any better understanding of the process of technological innovation is likely to increase our knowledge of mitigation possibilities and costs. This paper explores how international knowledge flows affect the dynamics of the domestic R&D sector and the main economic and environmental variables. The analysis is performed using WITCH, a dynamic regional model of the world economy, in which energy-related technological change is endogenous. The focus is on disembodied energy R&D international spillovers. The knowledge pool from which regions draw foreign ideas differs between High Income and Low Income countries. Absorption capacity is also endogenous in the model. The basic questions are as follows. Do knowledge spillovers enhance energy-related technological innovation in different regions of the world? Does the speed of innovation increase? Or do free-riding incentives prevail and international spillovers crowd out domestic R&D efforts? What is the role of domestic absorption capacity and of policies Contents lists available at ScienceDirectEnergy Economics j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e n e c o designed to enhance it? Do greenhouse gas stabilization costs drop in the presence of international technological spillovers? The new specification of the WITCH model presented in this paper enables us to answer these questions. Our analysis shows that international knowledge spillovers tend to increase free-riding incentives and decrease the investments in energy R&D. The strongest cuts in energy R&D investments are recorded among High Income countries, where international knowledge flows crowd out domestic R&D efforts. The overall domestic pool of knowledge, and thus total net GHG stabilization costs, remain largely unaffected. International spillovers, however, are also an important policy channel. We therefore analyze the implication of a policy-mix in which climate policy is combined with a technology policy designed to enhance absorption capacity in Low Income countries. Significant positive impacts on the costs of stabilizing GHG concentrations are singled out.Finally, a sensitivity analysis shows that High Income countries are more responsive than Low Income countries to changes in the parameters. Additional empirical research efforts should thus be focused on the former.