Boosting Sluggish Climate Policy: Endogenous Substitution, Learning, and Energy Efficiency Improvements

There is widespread concern that climate policy is moving too slowly and that decarbonization is coming too late for effective climate protection. We analyze three different empirically relevant effects that emerge endogenously during decarbonization and amplify climate policies: growing substitutability of dirty with clean energy inputs, learning and scale effects in renewable energies, and efficiency improvements in the application of energy. We employ the CITE simulation model, a dynamic computable general equilibrium (CGE) model with endogenous growth, to represent the macroeconomic framework of climate policy, calibrate the impacts, and obtain quantitative results. Using data from the Swiss economy, we find that improving energy substitutability is the most powerful individual mechanism. Taken together, the three mechanisms significantly shape the economy’s trajectory toward the net-zero policy target, reducing decarbonization costs by 60%. They exhibit notable synergy effects, particularly a self-reinforcing cycle between enhanced substitution and the expansion of clean energy. Implementing supportive subsidies for research and renewable energy lowers climate mitigation costs by an additional 6.5%, curtailing the overall adverse impact of climate policy on welfare from 1.0% to 0.37%.