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How constant is constant elasticity of substitution? Endogenous substitution between clean and dirty energy

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  • Jo, Ara
  • Miftakhova, Alena

Abstract

The degree of substitutability between clean and dirty energy plays a central role in leading economic analyses of optimal environmental policy. Despite the importance, assuming a constant and exogenous elasticity of substitution has been a dominant theoretical approach. We challenge this assumption by developing a dynamic general equilibrium model with an endogenous elasticity of substitution that interacts with the relative share of clean inputs in the economy. We find strong dynamic feedback effects arising from endogenous substitution capacity that amplifies the impact of directed technical change and accelerates the transition to a green economy.

Suggested Citation

  • Jo, Ara & Miftakhova, Alena, 2024. "How constant is constant elasticity of substitution? Endogenous substitution between clean and dirty energy," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:jeeman:v:125:y:2024:i:c:s0095069624000561
    DOI: 10.1016/j.jeem.2024.102982
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    Cited by:

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    3. Benmir, Ghassane & Mori, Aditya & Roman, Josselin & Tarsia, Romano, 2025. "Beneath the trees: the influence of natural capital on shadow price dynamics in a macroeconomic model with uncertainty," LSE Research Online Documents on Economics 128516, London School of Economics and Political Science, LSE Library.
    4. Cai, Zhixuan & Deng, Tianhu & Tang, Christopher S., 2026. "Rational versus presumptive decisions in a decentralized co-production system: Solutions and applications," Omega, Elsevier, vol. 138(C).
    5. Maria Alsina-Pujols & Isabel Hovdahl, 2026. "Charging the Transition: Directed Technical Change with Enabling Technologies," CESifo Working Paper Series 12664, CESifo.
    6. Cocker, Fleance George & Thalmann, Philippe & Vielle, Marc, 2025. "Input factor substitution under climate-neutral pathways," Applied Energy, Elsevier, vol. 399(C).
    7. Sahuc, Jean-Guillaume & Smets, Frank & Vermandel, Gauthier, 2024. "The New Keynesian Climate Model," CEPR Discussion Papers 19745, Centre for Economic Policy Research.
    8. Matthias Leuthard, 2025. "Equity and efficiency of carbon tax policies in Switzerland with endogenous energy substitution," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 161(1), pages 1-24, December.
    9. Aggarwal, Raavi, 2026. "Input substitution in electricity generation and industrial production: Evidence from India," Journal of Development Economics, Elsevier, vol. 179(C).
    10. Charlier, Dorothée & Pommeret, Aude & Ricci, Francesco, 2024. "A rationale for the Right-to-Development climate policy stance?," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    11. Mortha, Aline & Arimura, Toshi H., 2024. "Purchase or generate? An analysis of inter-fuel substitution and electricity generation in Japanese manufacturing plants," Energy Economics, Elsevier, vol. 139(C).
    12. Eugenie Dugoua & Jacob Moscona, 2025. "The Economics of Climate Innovation: Technology, Climate Policy, and the Clean Energy Transition," CESifo Working Paper Series 12267, CESifo.
    13. Ara Jo, 2025. "Substitution Between Clean And Dirty Energy With Biased Technical Change," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 66(2), pages 883-902, May.
    14. Eugenie Dugoua & Jacob Moscona, 2025. "The Economics of climate innovation: technology, climate policy, and the clean energy transition," CEP Discussion Papers dp2135, Centre for Economic Performance, LSE.

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    More about this item

    Keywords

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    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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