The Environment and Directed Technical Change

Working Paper: CEPR ID: DP8660

Authors: Daron Acemoglu; Philippe Aghion; Leonardo Bursztyn; David Hemous

Abstract: 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 slow 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.

Keywords: Directed Technological Change; Environment; Exhaustible Resources; Innovation

JEL Codes: C65; O30; O31; O33

Causal Claims

Cause	Effect
temporary taxation of dirty innovation and production (H23)	direction of technical change towards cleaner technologies (Q55)
combination of carbon taxes and research subsidies (H23)	more favorable outcome than either policy alone (E63)
timely policy actions (E63)	prevent environmental disasters (Q54)
depletion of resources (Q31)	encourage cleaner technologies (Q55)