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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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    Cited by:

    1. Charles Labrousse & Yann Perdereau, 2024. "Geography versus income: the heterogeneous effects of carbon taxation," PSE Working Papers halshs-04464900, HAL.
    2. Sun, Xiaojun & Fan, Yee Van & Lei, Yalin & Si, Chunyan & Cao, Zimin & Varbanov, Petar Sabev, 2025. "Mechanism of environmental regulation on energy productivity, energy structure, and carbon emissions: The role of directed technological progress," Energy, Elsevier, vol. 328(C).
    3. Chen, Xiaohong & Mao, Yue & Cheng, Jixin & Wei, Ping & Li, Xiaoming, 2024. "Green financial policy, technological advancement reversal, assessment of emission reduction effects," Energy Economics, Elsevier, vol. 136(C).
    4. Stephie Fried & David Lagakos, 2023. "Electricity and Firm Productivity: A General-Equilibrium Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(4), pages 67-103, October.
    5. Babonneau, Frédéric & Haurie, Alain & Vielle, Marc, 2025. "A robust asymptotic control model to analyze climate policy with CDR options," Journal of Economic Dynamics and Control, Elsevier, vol. 177(C).
    6. Hassan, Mahmoud & Lee, Ji-Yong & Rouge, Luc & Kouzez, Marc, 2025. "The impact of green public finance and green taxes on environmental and non-environmental innovation," Research in International Business and Finance, Elsevier, vol. 76(C).
    7. Coppens, Léo & Dietz, Simon & Venmans, Frank, 2025. "Optimal climate policy under exogenous and endogenous technical change: making sense of the different approaches," LSE Research Online Documents on Economics 129025, London School of Economics and Political Science, LSE Library.
    8. Casey, Gregory, 2024. "Unemployment and the direction of technical change," European Economic Review, Elsevier, vol. 168(C).
    9. Baldwin, Elizabeth & Cai, Yongyang & Kuralbayeva, Karlygash, 2020. "To build or not to build? Capital stocks and climate policy∗," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
    10. Bergmann, Tobias & Kalkuhl, Matthias, 2025. "Decoupling economic growth from energy use: The role of energy intensity in an endogenous growth model," Ecological Economics, Elsevier, vol. 230(C).
    11. Ding, Hongjie & Feng, Muzi & Chen, Qian, 2025. "How supply chain disruptions, renewable energy consumption, and eco-innovation mitigate environmental degradation? A path towards sustainable development in France," Energy Economics, Elsevier, vol. 145(C).
    12. Gregory Casey, 2018. "Technology-Driven Unemployment," 2018 Meeting Papers 302, Society for Economic Dynamics.
    13. Antosiewicz, Marek & Witajewski-Baltvilks, Jan, 2021. "Short- and long-run dynamics of energy demand," Energy Economics, Elsevier, vol. 103(C).
    14. Liu, Zhenhua & Wang, Yushu & Yuan, Xinting & Ding, Zhihua & Ji, Qiang, 2025. "Geopolitical risk and vulnerability of energy markets," Energy Economics, Elsevier, vol. 141(C).
    15. Jonathan T. Hawkins-Pierot & Katherine R. H. Wagner, 2023. "Technology Lock-In and Costs of Delayed Climate Policy," Working Papers 23-33, Center for Economic Studies, U.S. Census Bureau.
    16. Peter K. Kruse-Andersen, 2019. "Directed Technical Change, Environmental Sustainability, and Population Growth," Discussion Papers 19-12, University of Copenhagen. Department of Economics.
    17. Känzig, Diego R. & Williamson, Charles, 2024. "Unraveling the drivers of energy-saving technical change," Working Paper Series 2984, European Central Bank.
    18. Xinxing Liu & Xinheng Liu & Lei Li & Rong Xu & Qi Ban & Rui Xu, 2024. "Has Trade Liberalization Promoted Energy Efficiency in Enterprises?," Sustainability, MDPI, vol. 16(22), pages 1-21, November.
    19. Kruse-Andersen, Peter K., 2025. "Directed technical change and economic growth effects of environmental policy," Energy Economics, Elsevier, vol. 147(C).

    More about this item

    Keywords

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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