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The Environment and Directed Technical Change
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
2010 (English)Report (Other academic)
Abstract [en]

This paper introduces endogenous and directed technical change in a growth model with environmental constraints. A unique final good is produced by combining inputs from two sectors. One of these sectors uses “dirty” machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both “carbon taxes” and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.

Place, publisher, year, edition, pages
Stockholm: IIES , 2010. , 58 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University. (Online), ISSN 1653-610X ; 762
Keyword [en]
environment, exhaustible resources, directed technological change, innovation
National Category
URN: urn:nbn:se:su:diva-42313OAI: diva2:345160
Available from: 2010-08-24 Created: 2010-08-24 Last updated: 2010-08-24Bibliographically approved

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Aghion, Philippe
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