Transition to Green Technology along the Supply Chain

52 Pages Posted: 25 Mar 2024

See all articles by Philippe Aghion

Philippe Aghion

INSEAD; Collège de France; Centre for Economic Policy Research (CEPR); London School of Economics

Lint Barrage

ETH Zürich

David Hémous

University of Zürich; Centre for Economic Policy Research (CEPR)

Ernest Liu

Princeton University

Date Written: March 25, 2024

Abstract

We analyze a model of green technological transition along a supply chain. In each layer, a good is produced with a dirty technology, or, if the required “electrification” innovation has occurred, with a clean technology which uses the immediate upstream good. We show that the economy is characterized by a single equilibrium but multiple steady-states, and that even in the presence of Pigouvian environmental taxation, a targeted industrial policy is generally necessary to implement the social optimum. We also show that: (i) small, targeted, industrial policy may bring large welfare gains; (ii) a government which is constrained to focus its subsidies to electrification on one particular sector, should primarily target downstream sectors; (iii) when extending the model so as to allow for supply chains also for the dirty technology, overinvesting in electrification in the wrong upstream branch may derail the overall transition towards electrification downstream. Finally, we illustrate our model with a calibration to decarbonization of global iron and steel production via hydrogen direct reduction, and show that, absent industrial policy, the economy can get stuck in a “wrong” steady-state with CO2 emissions vastly above the social optimum even with a carbon price in place.

Suggested Citation

Aghion, Philippe and Barrage, Lint and Hemous, David and Liu, Ernest, Transition to Green Technology along the Supply Chain (March 25, 2024). INSEAD Working Paper No. 2024/15/EPS, Available at SSRN: https://ssrn.com/abstract=4771374 or http://dx.doi.org/10.2139/ssrn.4771374

Collège de France ( email )

Centre for Economic Policy Research (CEPR) ( email )

London School of Economics ( email )

Lint Barrage

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

David Hemous

University of Zürich ( email )

Zürich
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ernest Liu

Princeton University ( email )

Joseph Henry House
Princeton, NJ 08542
United States

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