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

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  • Gregory Casey

Abstract

I develop a directed technical change model of economic growth and energy efficiency in order to study the impact of climate change mitigation policies on energy use. I show that the standard Cobb–Douglas production function used in the environmental macroeconomics literature overstates the reduction in cumulative energy use that can be achieved with a given path of energy taxes. I also show that, in the model, the government combines energy taxes with research and development (R&D) policy that favors output-increasing technology—rather than energy efficiency technology—to maximize welfare subject to a constraint on cumulative energy use. In addition, I study energy use dynamics following sudden improvements in energy efficiency. Exogenous shocks that increase energy efficiency also decrease the incentive for subsequent energy efficiency R&D and increase long-run energy use relative to a world without the original shock. Subsidies for energy efficiency R&D, however, permanently alter R&D incentives and decrease long-run energy use.

Suggested Citation

  • Gregory Casey, 2024. "Energy Efficiency and Directed Technical Change: Implications for Climate Change Mitigation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 192-228.
    • Handle: RePEc:oup:restud:v:91:y:2024:i:1:p:192-228.
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    File URL: http://hdl.handle.net/10.1093/restud/rdad001
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