Energy Saving Innovation, Vintage Capital, and the Green Transition

Christian Keuschnigg and Giedrius Kazimieras Stalenis

No 11722, CESifo Working Paper Series from CESifo

Abstract: We study a small open economy that must implement an emissions reduction plan and eventually phase out fossil fuel. R&D leads to the design of energy saving new machines. Endogenous scrapping eliminates old inefficient machines. We identify two distortions that delay the adoption and diffusion of energy saving technology: scrapping of old equipment and investment in new machines are both too low. The optimal policy to manage the energy transition thus combines a carbon tax with a profit tax to speed up exit, and an investment subsidy to speed up investment in new equipment. The optimal policy increases capital turnover, the diffusion of energy saving technology, and thereby mitigates the costs of the energy transition. Compared to a policy that exclusively relies on carbon taxes, the optimal policy could reduce the GDP loss of moving to net zero from 7.8 to 6.1% of GDP.

Keywords: energy saving innovation; vintage capital; emissions reduction (search for similar items in EconPapers)
JEL-codes: D21 D62 H23 O33 Q41 Q43 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11722

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