Imperfect Resource Substitution and Optimal Transition to Clean Technologies

Non-renewable and renewable resources are imperfect substitutes due to technical and geographical constraints. What is the role of imperfect substitution on the optimal transition path to the clean technologies? We address this question by characterizing the optimal growth path and resource use of an economy. We show that the economy initially starts with using the non-renewable and renewable resources simultaneously and gradually increases the share of renewable. The outcome can be either (i) the economy switches to a backstop at a certain date or (ii) the initial regime lasts forever. The results show that the economy converges to a steady state even if the backstop is too costly and a green, zerocarbon economy is the optimal final state in any case. We also present some simulation results to illustrate the shapes of the optimal paths. This analysis allows us to discuss the policy implications and question the existence of the Green Paradox.