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Switching to clean(er) technologies in a stochastic environment

Mosiño, Alejandro and Pommeret, Aude (2015): Switching to clean(er) technologies in a stochastic environment.

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Abstract

In this paper, we consider an economy having access to two different energy sources. The first one is coming from natural polluting resources; and second one is coming from a backstop natural resource. There are two productive sectors in the economy. The first one is dedicated to manufacturing the backstop resources; the second one is devoted to production of the consumption good. Both sectors are dirty in the sense that both use the polluting resource at any time. The social planner, however, has always the possibility of paying an irreversible fixed cost to switch the consumption sector towards the use of a cleaner technology. Additionally, we assume that the accumulation of the backstop, and the increase in pollution stock are stochastic. Our results imply that the incentives to switch to the cleaner technology depend on the relative importance of fossil fuels in the production of consumption goods after the switch. We also find that technological improvement in the solar panels sector is of some importance in order to switch to cleaner technologies.

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