Go green or go home? Energy transition, directed technical change and wage inequalit

What happens to workers of the fossil fuels industry if an energy transition takes place? Even though an energy transition is one of the main objectives in the flght against climate change, it carries several economic and social costs, especially as it has heterogeneous effects on different groups of individuals. This paper introduces a directed technical change model where innovation is focused on the energy sector that demands both skilled and low-skilled labor. In this context, I show how an environmental catastrophe is inevitable if there is not a policy to carry out an energy transition. Once this policy is implemented, there is directed technical change toward the clean sector and workers in the dirty sector bear an extra cost to adapt their abilities to the skills' demand in the new sector. Consequently, the existing income gap is amplified following i) changes in relative labor supply favoring workers in the clean sector and ii) a reduction in disposable income for human capital investment. Government intervention is needed to compensate households and guarantee that economic and environmental gains from the energy transition outweigh its welfare losses.