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The Environment and Directed Technical Change

60 Pages Posted: 31 Aug 2010  

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Leonardo Bursztyn

Harvard University - Department of Economics

David Hémous

INSEAD

Multiple version iconThere are 3 versions of this paper

Date Written: April 28, 2010

Abstract

This paper introduces endogenous and directed technical change in a growth model with environmental constraints. A unique final good is produced by combining inputs from two sectors. One of these sectors uses "dirty" machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both “carbon taxes” and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.

Keywords: Environment, Exhaustible Resources, Directed Technological Change, Innovation

JEL Classification: O30, O31, O33, C65

Suggested Citation

Acemoglu, Daron and Aghion, Philippe and Bursztyn, Leonardo and Hémous, David, The Environment and Directed Technical Change (April 28, 2010). FEEM Working Paper No. 93.2010. Available at SSRN: https://ssrn.com/abstract=1668575 or http://dx.doi.org/10.2139/ssrn.1668575

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Philippe Aghion

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leonardo Bursztyn

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
United States

David Hemous

INSEAD ( email )

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77305 Fontainebleau Cedex
France

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