Energy Efficiency and Directed Technical Change: Implications for Climate Change Mitigation

Casey, Gregory (2017): Energy Efficiency and Directed Technical Change: Implications for Climate Change Mitigation.

Abstract

In the United States, rising energy efficiency, rather than the use of less carbon-intensive energy sources, has driven the decline in the carbon intensity of output. Thus, understanding how environmental policy will affect energy efficiency should be a primary concern for climate change mitigation. In this paper, I evaluate the effect of environmental taxes on energy use in the United States. To do so, I construct a putty-clay model of directed technical change that matches several key features of the data on U.S. energy use. The model builds upon the standard Cobb-Douglas approach used in climate change economics in two ways. First, it allows the elasticity of substitution between energy and non-energy inputs to differ in the short and long run. Second, it allows for endogenous and directed technical change. In the absence of climate policy, the new putty-clay model of directed technical change and the standard Cobb-Douglas approach have identical predictions for long-run energy use. The reactions to climate policies, however, differ substantially. In particular, the new putty-clay model of directed technical change suggests that a 6.9-fold energy tax in 2055 is necessary to achieve policy goals consistent with the 2016 Paris Agreement and that such a tax would lead to 6.8% lower consumption when compared to a world without taxes. By contrast, the standard Cobb-Douglas approach suggests that a 4.7-fold tax rate in 2055 is sufficient, which leads to a 2% decrease in consumption. Thus, compared to the standard approach, the new model predicts that greater taxation and more forgone consumption are necessary to achieve environmental policy goals.

• Item Type: MPRA Paper
• Language: English
• Keywords: Energy, Climate Change, Directed Technical Change, Growth
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q40 - General; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming

References

Acemoglu, D. (1998): "Why do new technologies complement skills? Directed technical change and wage inequality," Quarterly Journal of Economics, 1055-1089.

Acemoglu, D. (2002): "Directed technical change," Review of Economic Studies, 69, 781-809.

Acemoglu, D. (2007): "Equilibrium bias of technology," Econometrica, 75, 1371-1409.

Acemoglu, D., P. Aghion, L. Bursztyn, and D. Hemous (2012): "The environment and directed technical change," American Economic Review, 102, 131-66."

Acemoglu, D., U. Akcigit, D. Hanley, and W. Kerr (2016): "Transition to clean technology," Journal of Political Economy, 124, 52-104.

Aghion, P., A. Dechezlepr^etre, D. H�emous, R. Martin, and J. Van Reenen (2016): "Carbon Taxes, Path Dependency, and Directed Technical Change: Evidence from the Auto Industry," Journal of Political Economy, 124, 1-51.

Aghion, P. and P. Howitt (1992): "A model of growth through creative destruction," Econometrica, 323-351.

Anderson, S. T., R. Kellogg, and S. W. Salant (2014): "Hotelling under pressure," NBER Working Paper 20280.

Andre, F. J. and S. Smulders (2014): "Fueling growth when oil peaks: Directed technological change and the limits to efficiency," European Economic Review, 69, 18-39.

Atkeson, A. and P. J. Kehoe (1999): "Models of energy use: Putty-putty versus putty-clay," American Economic Review, 89, 1028-1043.

Barrage, L. (2014): "Optimal dynamic carbon taxes in a climate-economy model with distortionary fiscal policy," Working Paper.

Barrage, L. (2016): "Be Careful What You Calibrate For: Social Discounting in General Equilibrium," Working Paper.

Calel, R. and A. Dechezlepretre (2016): "Environmental policy and directed technological change: Evidence from the European carbon market," Review of Economics and Statistics, 98, 173-191.

Calvo, G. A. (1976): "Optimal Growth in a Putty-Clay Model," Econometrica, 867-878.

Cass, D. and J. E. Stiglitz (1969): "The implications of alternative saving and expectations hypotheses for choices of technique and patterns of growth," Journal of Political Economy, 586-627.

Crassous, R., J.-C. Hourcade, and O. Sassi (2006): "Endogenous structural change and climate targets modeling experiments with Imaclim-R," Energy Journal, 259-276.

Dechezlepretre, A., M. Glachant, I. Hascic, N. Johnstone, and Y. Meniere (2011): "Invention and transfer of climate change mitigation technologies: A global analysis," Review of Environmental Economics and Policy, 5, 109-130.

Fried, S. (2015): "Climate policy and innovation: A quantitative macroeconomic analysis," Working Paper.

Gans, J. S. (2012): "Innovation and climate change policy," American Economic Journal: Economic Policy, 125-145.

Garcia-Macia, D., C.-T. Hsieh, and P. J. Klenow (2015): "How Destructive is Innovation?" Working Paper.

Golosov, M., J. Hassler, P. Krusell, and A. Tsyvinski (2014): "Optimal taxes on fossil fuel in general equilibrium," Econometrica, 82, 41-88.

Goulder, L. H. and K. Mathai (2000): "Optimal CO2 abatement in the presence of induced technological change," Journal of Environmental Economics and Management, 39, 1-38.

Goulder, L. H. and S. H. Schneider (1999): "Induced technological change and the attractiveness of CO2 abatement policies," Resource and Energy Economics, 21, 211-253.

Hamilton, J. D. (2008): "Understanding crude oil prices," NBER Working Paper No. 14492.

Hamilton, J. D. (2012): "Oil prices, exhaustible resources, and economic growth," NBER Working Paper 17759.

Hassler, J., P. Krusell, and J. Nycander (2016a): "Climate policy," Economic Policy, 31, 503-558.

Hassler, J., P. Krusell, and C. Olovsson (2012): "Energy-saving technical change," NBER Working Paper No. 18456.

Hassler, J., P. Krusell, and C. Olovsson (2016b): "Directed technical change as a response to natural-resource scarcity," Working Paper.

Hotelling, H. (1931): "The economics of exhaustible resources," Journal of Political Economy, 137-175.

Jaffe, A. B., R. G. Newell, and R. N. Stavins (2003): "Technological change and the environment," Handbook of Environmental Economics, 1, 461-516.

Johansen, L. (1959): "Substitution versus fixed production coefficients in the theory of economic growth: a synthesis," Econometrica, 157-176.

Krautkraemer, J. A. (1998): "Nonrenewable resource scarcity," Journal of Economic literature, 36, 2065-2107.

Lemoine, D. (2015): "Energy transitions: Directed technical change meets directed extraction," Working Paper.

Livernois, J. R. and R. S. Uhler (1987): "Extraction costs and the economics of nonrenewable resources," Journal of Political Economy, 95, 195-203.

Morris, J., S. Paltsev, and J. Reilly (2012): "Marginal abatement costs and marginal welfare costs for greenhouse gas emissions reductions: results from the EPPA model," Environmental Modeling & Assessment, 17, 325-336.

Newell, R. G., A. B. Jaffe, and R. N. Stavins (1999): "The induced innovation hypothesis and energy-saving technological change," Quarterly Journal of Economics, 941-975.

Nordhaus, W. D. (2007): "A review of the Stern review on the economics of climate change," Journal of Economic Literature, 45, 686-702.

Nordhaus, W. D. (2010): "Economic aspects of global warming in a post-Copenhagen environment," Proceedings of the National Academy of Sciences, 107, 11721-11726.

Nordhaus, W. D. (2013): The climate casino: Risk, uncertainty, and economics for a warming world, Yale University Press.

Nordhaus, W. D. and J. Boyer (2003): Warming the world: Economic models of global warming, MIT press.

Peretto, P. F. (2008): "Effluent taxes, market structure, and the rate and direction of endogenous technological change," Environmental and Resource Economics, 39, 113-138.

Peretto, P. F. and S. Valente (2015): "Growth on a finite planet: Resources, technology and population in the long run," Journal of Economic Growth, 20, 305-331.

Pindyck, R. S. (1978): "The optimal exploration and production of nonrenewable resources," Journal of Political Economy, 841-861.

Pindyck, R. S. (1999): "The long-run evolution of energy prices," Energy Journal, 1-27.

Pindyck, R. S. and J. J. Rotemberg (1983): "Dynamic factor demands and the effects of energy price shocks," American Economic Review, 73, 1066-1079.

Popp, D. (2002): "Induced innovation and energy prices," American Economic Review, 92, 160-180.

Popp, D. (2004): "ENTICE: Endogenous technological change in the DICE model of global warming," Journal of Environmental Economics and Management, 48, 742-768.

Popp, D., R. G. Newell, and A. B. Jaffe (2010): "Energy, the environment, and technological change," Handbook of the Economics of Innovation, 2, 873-937.

Raupach, M. R., G. Marland, P. Ciais, C. Le Quere, J. G. Canadell, G. Klepper, and C. B. Field (2007): "Global and regional drivers of accelerating CO2 emissions," Proceedings of the National Academy of Sciences, 104, 10288-10293.

Schenk, C. J., M. Brownfield, R. Charpentier, T. Cook, D. Gautier, D. Higley, M. Kirschbaum, T. Klett, J. Pitman, R. Pollastro, et al. (2012): "An estimate of undiscovered conventional oil and gas resources of the world, 2012," USGS Fact Sheet, 3028.

Smulders, S. and M. De Nooij (2003): "The impact of energy conservation on technology and economic growth," Resource and Energy Economics, 25, 59-79.

Solow, R. M. (1962): "Substitution and fixed proportions in the theory of capital," Review of Economic Studies, 29, 207-218.

Stern, N. (2013): "The structure of economic modeling of the potential impacts of climate change: Grafting gross underestimation of risk onto already narrow science models," Journal of Economic Literature, 51, 838-859.

Sue Wing, I. (2003): "Induced technical change and the cost of climate policy," MIT Joint Program on the Science and Policy of Global Change Report No. 102.

Van der Meijden, G. and S. Smulders (2014): "Carbon lock-In: The role of expectations," Working Paper.

Van der Werf, E. (2008): "Production functions for climate policy modeling: An empirical analysis," Energy Economics, 30, 2964-2979.

Wing, I. S. (2008): "Explaining the declining energy intensity of the US economy," Resource and Energy Economics, 30, 21-49.

Wing, I. S. and R. S. Eckaus (2007): "The implications of the historical decline in US energy intensity for long-run CO2 emission projections," Energy Policy, 35, 5267-5286.