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Transition to Green Technology along the Supply Chain

Author

Listed:
  • Aghion, Philippe
  • Barrage, Lint
  • Donald, Eric
  • Hémous, David
  • Liu, Ernest

Abstract

We analyze a model of green technological transition along a supply chain. The model generates a unique equilibrium for given initial conditions but multiple steady states. We show that: (i) even in the presence of Pigouvian environmental taxation, targeted sectoral subsidies are generally necessary to implement the social optimum; (ii) small, targeted industrial policy may bring large welfare gains; (iii) a government which is unable to subsidize greenification in more than one sector or price carbon at its true social cost should primarily target downstream sectors; (iv) overinvesting in greenification in the wrong upstream branch may derail the overall transition towards greenification. Finally, we calibrate our model to decarbonization of heavy duty transportation (trucking, aviation, etc.) via hydrogen. We find that, absent industrial policy, the economy can get stuck in the “wrong†steady-state with CO2 emissions vastly above the social optimum even with a Pigouvian carbon price in place.

Suggested Citation

  • Aghion, Philippe & Barrage, Lint & Donald, Eric & Hémous, David & Liu, Ernest, 2025. "Transition to Green Technology along the Supply Chain," CEPR Discussion Papers 20378, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:20378
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    Cited by:

    1. is not listed on IDEAS
    2. Aicha Kharazi & Peter Hopkinson & Markus Zils & Tomoko Kobayashi, 2025. "A dynamic production network approach to model resource productivity shocks from policy interventions in the UK," International Economics and Economic Policy, Springer, vol. 22(4), pages 1-42, October.
    3. Tiago Cavalcanti & Kamiar Mohaddes & Hongyu Nian & Haitao Yin, 2025. "Environmental Pressure in Supply Chains: Pass-Through Effects on R&D and Innovation," CAMA Working Papers 2025-55, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Pu Chen & Willi Semmler, 2025. "Energy Transition, Price-Quantity Market Interactions and Inflation – A Model-guided Study and CIVAR Empirics for the US Explaining Fossilflation and Greenflation," Working Papers 2504, New School for Social Research, Department of Economics.
    5. Sonja Dobkowitz, 2026. "Meeting Climate Targets under Distortionary Fiscal Policy: Directed Technical Change and Learning-by-Doing," Discussion Papers of DIW Berlin 2161, DIW Berlin, German Institute for Economic Research.
    6. Rick van der Ploeg & Anthony J. Venables, 2026. "Triggering the Green Transition; Policies for Transitional Dynamics," CESifo Working Paper Series 12647, CESifo.
    7. van der Ploeg, Frederick & Rezai, Armon, 2026. "Climate Change, Climate Policy, and the Macroeconomy," CEPR Discussion Papers 21153, Centre for Economic Policy Research.
    8. repec:cam:camjip:2528 is not listed on IDEAS

    More about this item

    Keywords

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    JEL classification:

    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • 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
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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