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How constant is constant elasticity of substitution? Endogenous substitution between clean and dirty energy

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  • Jo, Ara
  • Miftakhova, Alena

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, assuming 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.

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  • Jo, Ara & Miftakhova, Alena, 2024. "How constant is constant elasticity of substitution? Endogenous substitution between clean and dirty energy," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:jeeman:v:125:y:2024:i:c:s0095069624000561
    DOI: 10.1016/j.jeem.2024.102982
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    1. Charlier, Dorothée & Pommeret, Aude & Ricci, Francesco, 2024. "A rationale for the Right-to-Development climate policy stance?," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).

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    More about this item

    Keywords

    Elasticity of substitution; Directed technical change; Climate change;
    All these keywords.

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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