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American Economic Review Vol. 102 No. 1 2012

The Environment and Directed Technical Change

Daron Acemoglu1; Philippe Aghion2; Leonardo Bursztyn3; David Hémous4

1 Massachusetts Institute of Technology, Department of Economics, 50 Memorial Drive, Cambridge MA 02142-1347 and Canadian Institute for Advanced Research. · 2 Harvard University, Department of Economics, Littauer Center, 1805 Cambridge Street, Cambridge, MA 02138; Stockholm University (IIES); and Canadian Institute for Advanced Research. · 3 University of California Los Angeles, Anderson School of Management, 110 Westwood Plaza, C-513 Los Angeles, CA 90095-1481. · 4 Harvard University, Department of Economics, Littauer Center, 1805 Cambridge Street, Cambridge, MA 02138.

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Abstract

This paper introduces endogenous and directed technical change in a growth model with environmental constraints and limited resources. 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, as a function of the degree of substitutability between clean and dirty inputs, environmental and resource stocks, and cross-country technological spillovers. 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 (corresponding to those used in existing models with exogenous technology) 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. We also show that in a two-country extension, even though optimal environmental policy involves global policy coordination, when the two inputs are sufficiently substitutable environmental regulation only in the North may be sufficient to avoid a global disaster.

DOI
10.1257/aer.102.1.131
Volume
102
Issue
1
Pages
131-166
Language
en
Sources
crossref openalex bibtex:phds-export.bib

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