The Environment and Directed Technical Change

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The Environment and Directed Technical Change

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Title: The Environment and Directed Technical Change
Author: Hemous, David; Bursztyn, Leonardo; Aghion, Philippe; Acemoglu, Daron

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Citation: Acemoglu, Daron, Philippe Aghion, Leonardo Bursztyn, and David Hemous. 2009. The environment and directed technical change. Unpublished working paper, Harvard University, July 6, 2009.
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Abstract: This paper introduces endogenous and directed technical change in a growth model with environmental constraints and limited resources. A unique final good is produced by combining inputs from two sectors. One of these sectors uses "dirty" machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare, as a function of structural characteristics of the economy, in particular the degree of substitutability between clean and dirty inputs, environmental and resource stocks, and cross-country technological spillovers. First, we find that factoring in directed technical change: (i) increases the cost of delaying intervention, particularly when the inputs are highly substitutable; (ii) calls for the use of profit taxes or other instruments to direct innovation, in addition to the input (carbon) tax emphasized in the literature. Second, we show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iii) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Third, we find that under reasonable parameter values (corresponding to those used in existing models with exogenous technology) and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately. Finally, in a two-country extension of the baseline model where: (a) the two inputs are sufficiently substitutable in both countries; (b) dirty input production in both countries depletes the global environmental stock; (c) the South imitates technologies invented in the North, we show that taxing dirty innovation and production in the North only may be sufficient to avoid a global disaster, but international trade increases the need for global policy coordination.
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