General Purpose Technologies and Energy Policy

We employ a general purpose technology model with endogenous stochastic growth to simulate the effects of different energy policy schemes. An R&D sector produces endogenous growth by developing radical and incremental technologies. These innovations result in blueprints for capital intermediates, which require raw capital and either carbon or noncarbon-based fuels. A carbon tax therefore affects not only the final production sector but also the R&D sector by making the development of non-carbon-based technologies more attractive. Due to path dependencies and possible lock-in situations, policy can have a significant long-term impact on the energy structure of the economy. Allowing for different elasticities of substitution between consumption and environmental quality, we examine the effects of different carbon policies on growth, environmental quality, and welfare. We find that an anti-carbon policy may reduce welfare initially, but in the long run there is a strong potential for a ‘double dividend’ due to faster growth and reduced pollution.