Innovation-Led Transitions in Energy Supply
American Economic Journal: Macroeconomics (Forthcoming)
Generalizing models of directed technical change, I show that complementarities between innovations and factors of production (here
energy resources) can drive transitions away from a dominant sector. In a calibrated numerical implementation, the economy gradually transitions energy supply from coal to gas and then to renewable energy even in the absence of policy. The welfare-maximizing
tax on carbon emissions is J-shaped, immediately redirects most
research to renewables, and rapidly transitions energy supply directly to renewables. The emission tax is twice as valuable as either
the welfare-maximizing research subsidy or the welfare-maximizing
mandate to use renewable resources.