How Constant is Constant Elasticity of Substitution? Endogenous Substitution between Clean and Dirty Energy
Ara Jo (ajo@ethz.ch) and
Alena Miftakhova (alenam@ethz.ch.ch)
Additional contact information
Ara Jo: Center of Economic Research (CER-ETH), ETH Zürich, Zürichbergstrasse 18, 8032 Zürich, Switzerland
Alena Miftakhova: Center of Economic Research (CER-ETH), ETH Zürich, Zürichbergstrasse 18, 8032 Zürich, Switzerland
No 22/369, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich
Abstract:
The degree of substitutability between clean and dirty energy plays a central role in leading economic analyses of optimal environmental policy. Despite the importance, a constant and exogenous elasticity of substitution has been a dominant theoretical approach. We challenge this assumption by developing a dynamic general equilibrium model with an endogenous elasticity of substitution that interacts with the relative share of clean inputs in the economy. We find strong dynamic feedback effects arising from endogenous substitution capacity that amplifies the impact of directed technical change and accelerates the transition to a green economy
Keywords: Elasticity of substitution; directed technical change; climate change (search for similar items in EconPapers)
JEL-codes: O33 Q40 Q54 Q55 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022-03
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-gro and nep-res
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Citations: View citations in EconPapers (2)
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