Substituting Clean for Dirty Energy: A Bottom-Up Analysis

We analyze the macroeconomic substitution between clean and dirty inputs through the lens of production isoquants derived from a numerical bottom-up model of electricity production. This approach also allows us to study high shares of clean energy not observable today and isolate mechanisms that impact the elasticity of substitution between clean and dirty inputs. Our results, for the first time, demonstrate that aggregate production functions used in macroeconomic models can represent the complex substitution patterns obtained from numerical models. Further, we show that (i) dirty inputs are not essential for production—as long as some energy storage is available, the elasticity of substitution between clean and dirty inputs is above unity; (ii) no single clean technology is indispensable, but a balanced mix facilitates substitution; (iii) substitution is harder for higher shares of clean energy. Finally, we demonstrate how changing availability of generation and storage technologies can be implemented in macroeconomic models.