Production Function as a Set of Discrete Options: Neoclassical, Net Zero, and Climate Neutrality

This study examines the relationship between the neoclassical, net-zero, and climate neutrality perspectives, an area that has received limited attention in formal economic analysis. Adopting the concept of factor substitution, we model the production function as a set of discrete, substitutable options to explore the properties and interactions of these three perspectives. The findings demonstrate that each perspective yields a non-empty subset of solution options. Climate neutrality solutions are situated between neoclassical and net-zero solutions, exhibit discrete convexity, and are influenced by the level of GHG credit costs. Lower GHG credit costs tend to favour neoclassical solutions, while higher costs shift preference toward net-zero solutions. This highlights the importance of GHG credit pricing in guiding the transition to a low-emissions economy. Moreover, the framework enables the categorization of new climate mitigation options based on their effects, whether they are irrelevant, complementary, or disruptive. Overall, the proposed model provides an alternative formal approach that enhances the economic analysis of climate change mitigation strategies.