Energy taxes and endogenous technological change (Preliminary: Please do not cite)

This paper studies the effects of a Pigouvian tax on energy use on the growth path of a model economy where market structure is endogenous and jointly determined with the rate of technological change. Because this economy does not exhibit the scale effect (a positive relation between growth and aggregate effort in R&D), the tax has no effect on the economy’s steady-state growth rate. It has, however, important transitional effects that give rise to surprising results. Specifically, under plausible conditions a small tax can raise long-run consumption and welfare despite the fact that — in line with standard intuition — it lowers consumption in the short run.