Renewable Technology Adoption and the Macroeconomy

26 Pages Posted: 27 Mar 2017

See all articles by Bernardino Adão

Bernardino Adão

Banco de Portugal

Borghan Narajabad

Board of Governors of the Federal Reserve System

Ted P. Loch-Temzelides

Rice University

Date Written: March 06, 2017

Abstract

We study the effect of technological progress on the optimal transition to a renewable energy-fueled world economy. We develop a dynamic general equilibrium model where energy is used as an input in production and can come from fossil or renewable sources. Both require the use of capital, which is also needed in the production of final goods. Renewable energy firms can invest in improving the productivity of their capital stock. The actual improvement is subject to spillovers and involves an opportunity cost. This results in underinvestment in the productivity of renewable energy capital. In the presence of environmental externalities, the optimal allocation can be implemented through a Pigouvian tax on fossil fuel, together with policy that promotes new renewable technologies. We calibrate our model using world-economy data and characterize the transition toward a low carbon economy. We find that it is optimal for renewables to “start small” and pick up their market penetration only later. In the short run, investment is needed mainly to improve productivity in the renewable energy sector. Later, renewable energy contributes by becoming a “modest” engine of economic growth. It takes approximately 150 years before fossil fuel is phased out entirely, resulting in a 2.8 degree Celsius temperature increase.

JEL Classification: D810, H210, Q540

Suggested Citation

Adão, Bernardino Manuel and Narajabad, Borghan and Loch-Temzelides, Ted P., Renewable Technology Adoption and the Macroeconomy (March 06, 2017). CESifo Working Paper Series No. 6372, Available at SSRN: https://ssrn.com/abstract=2941401

Bernardino Manuel Adão

Banco de Portugal ( email )

Research Department
1150 Lisbon
Portugal
(351 21) 312 8409 (Phone)
(351 21) 815 3623 (Fax)

Borghan Narajabad

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Ted P. Loch-Temzelides (Contact Author)

Rice University ( email )

99 Sunset Blvd
Houston, TX Texas 77005
United States

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