This paper by Carolyn Fischer and Richard G. Newell assesses various policies aimed at reducing carbon dioxide emissions and promoting the innovation and diffusion of renewable energy. The authors evaluate the effectiveness of different policies based on their incentives for emissions reduction, efficiency, and other outcomes. They also consider how the nature of technological progress—whether it occurs through learning by doing or R&D investment, and the degree of knowledge spillovers—affects the desirability of different policies. The study finds that optimal policy involves a portfolio of different instruments targeted at emissions, learning, and R&D. In a numerical application to the U.S. electricity sector, the relative cost of individual policies in achieving reductions is as follows: (1) emissions price, (2) emissions performance standard, (3) fossil power tax, (4) renewables market share requirement, (5) renewables production subsidy, and (6) R&D subsidy for renewables. Despite the diversity of policies, an optimal portfolio of policies achieves emission reductions at significantly lower cost than any single policy. The paper concludes that the nature of knowledge accumulation is less important than the nature of policy incentives, but these forces can interact in significant ways, and separate policy instruments are necessary to address both climate and knowledge externalities.This paper by Carolyn Fischer and Richard G. Newell assesses various policies aimed at reducing carbon dioxide emissions and promoting the innovation and diffusion of renewable energy. The authors evaluate the effectiveness of different policies based on their incentives for emissions reduction, efficiency, and other outcomes. They also consider how the nature of technological progress—whether it occurs through learning by doing or R&D investment, and the degree of knowledge spillovers—affects the desirability of different policies. The study finds that optimal policy involves a portfolio of different instruments targeted at emissions, learning, and R&D. In a numerical application to the U.S. electricity sector, the relative cost of individual policies in achieving reductions is as follows: (1) emissions price, (2) emissions performance standard, (3) fossil power tax, (4) renewables market share requirement, (5) renewables production subsidy, and (6) R&D subsidy for renewables. Despite the diversity of policies, an optimal portfolio of policies achieves emission reductions at significantly lower cost than any single policy. The paper concludes that the nature of knowledge accumulation is less important than the nature of policy incentives, but these forces can interact in significant ways, and separate policy instruments are necessary to address both climate and knowledge externalities.