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Promoting clean technologies: The energy market structure crucially matters

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  • Théophile T. Azomahou

    (UNU-MERIT, Maastricht University, The Netherlands)

  • Raouf Boucekkine

    (UCLouvain, Belgium, and University of Glasgow, UK)

  • Phu Nguyen-Van

    (THEMA-CNRS, Université de Cergy-Pontoise, France)

Abstract

We develop a general equilibrium vintage capital model with embodied energy- saving technological progress and an explicit energy market to study the impact of investment subsidies on investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy con- suming and scrapping is endogenous. It is shown that the impact of investment subsidies heavily depends on the structure of the energy market, the mechanism explaining this outcome relying on the tight relationship between the lifetime of capital goods and energy prices via the scrapping conditions inherent to vintage models. In particular, under a free entry structure for the energy sector, invest- ment subsidies boost investment, while the opposite result emerges under natural monopoly if increasing returns in the energy sector are not strong enough.

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Bibliographic Info

Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-19.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-19

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Keywords: Energy-saving technological progress; vintage capital; energy market; natural monopoly; investment subsidies;

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