Transition to Green Technology along the Supply Chain

Philippe Aghion, Lint Barrage, Eric Donald, Hémous, David and Ernest Liu

No 20378, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze a model of green technological transition along a supply chain. The model generates a unique equilibrium for given initial conditions but multiple steady states. We show that: (i) even in the presence of Pigouvian environmental taxation, targeted sectoral subsidies are generally necessary to implement the social optimum; (ii) small, targeted industrial policy may bring large welfare gains; (iii) a government which is unable to subsidize greenification in more than one sector or price carbon at its true social cost should primarily target downstream sectors; (iv) overinvesting in greenification in the wrong upstream branch may derail the overall transition towards greenification. Finally, we calibrate our model to decarbonization of heavy duty transportation (trucking, aviation, etc.) via hydrogen. We find that, absent industrial policy, the economy can get stuck in the “wrong†steady-state with CO2 emissions vastly above the social optimum even with a Pigouvian carbon price in place.

Keywords: Supply chain; Innovation; Network; Climate change (search for similar items in EconPapers)
JEL-codes: L14 O25 O31 O33 O44 Q55 (search for similar items in EconPapers)
Date: 2025-06
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