Energy Efficiency and Directed Technical Change: Implications for Climate Change Mitigation

Abstract

I construct a putty-clay model of directed technical change and use it to analyze the effect of environmental policy on energy use in the United States. The model matches key data patterns that cannot be explained by the standard Cobb-Douglas approach used in climate change economics. My primary analysis examines the impact of new energy taxes. The new putty-clay model suggests that tax-inclusive energy prices need to be 290% higher than laissez-faire levels in 2055 in order to achieve policy goals consistent with the international agreements. By contrast, the Cobb-Douglas approach suggests that tax-inclusive energy prices need only be 150% higher. Similarly, the new model predicts that the energy expenditure share must rise to 5%-compared with 3.3% today-while the standard model assumes that rapid declines in energy use will leave the expenditure share unchanged. The putty-clay model also implies that final good consumption must fall by 2.8% to meet policy goals, which is double the prediction from the standard model. In a second analysis, I find that policy interventions cannot achieve long-run reductions in energy use without increasing prices, implying that, by themselves, energy efficiency mandates and R&D subsidies have limited potential as tools for climate change mitigation. Finally, I use the model to analyze the long-run sustainability of economic growth in a world with non-renewable resources. Using two definitions of sustainability, I find that the new putty-clay model delivers results that are more optimistic than the existing literature.

Electricity and Firm Productivity: A General-Equilibrium Approach

“…To do so, we build a dynamic macroeconomic model that incorporates several key aspects of how electricity is provided in the developing world, and how firms respond to an unreliable electricity supply. First, electricity is a strong complement to capital in the production function and other inputs cannot be easily be substituted for electricity (Atkeson and Kehoe, 1999;Hassler, Krusell, and Olovsson, 2015;Casey, 2018). Second, electricity is provided through the grid at a low price but rationed, with unpredictable power outages occurring in equilibrium (see e.g.…”

“…Much of this literature focuses on the macroeconomic and environmental impacts of a carbon tax. Previous studies explore these impacts in a variety of different settings, including neoclassical growth frameworks, (e.g.,Golosov, Hassler, Krusell, and Tsyvinski, 2014;Barrage, 2019;Fried, Novan, and Peterman, 2018) and models of endogenous innovation (e.g.,Acemoglu, Aghion, Bursztyn, and Hémous, 2012;Hémous, 2016;Casey, 2018;Fried, 2018;Lemoine, 2018). A common theme is that there is an important role for energy in the production function, though we abstract from environmental factors.…”

Directed Technical Change, Environmental Sustainability, and Population Growth

“…In another related study, Casey (2017) develops an endogenous growth model where research efforts can improve productivity and energy efficiency of capital goods. Energy taxes incentivize energy efficiency research at the expense of productivity-increasing research.…”

Electricity and Firm Productivity: A General-Equilibrium Approach

“…Much of this literature focuses on the macroeconomic and environmental impacts of a carbon tax. Previous studies explore these impacts in a variety of different settings, including neoclassical growth frameworks, (e.g.,Golosov, Hassler, Krusell, and Tsyvinski, 2014;Barrage, 2019;Fried, Novan, and Peterman, 2018) and models of endogenous innovation (e.g.,Acemoglu, Aghion, Bursztyn, and Hémous, 2012;Hémous, 2016;Casey, 2018;Fried, 2018;Lemoine, 2018). A common theme is that there is an important role for energy in the production function, though we abstract from environmental factors.…”