Events

Professor David Hemous
Associate Professor of Economics of Innovation and Entrepreneurship
University of Zurich

Abstract:

We analyze a model of green technological transition along a supply chain. In each layer, a good is produced with a dirty technology, or, if the required “electrification” innovation has occurred, with a clean technology which uses the immediate upstream good. We show that the economy is characterized by a single equilibrium but multiple steady-states, and that even in the presence of Pigouvian environmental taxation, a targeted industrial policy is generally necessary to implement the social optimum. We also show that: (i) small, targeted industrial policy may bring large welfare gains; (ii) a government which is constrained in its policy instruments, either unable to subsidize electrification in more than one sector or price carbon at its true social cost, should primarily target downstream sectors; and (iii) when extending the model so as to allow for supply chains also for the dirty technology, overinvesting in electrification in the wrong upstream branch may derail the overall transition towards electrification downstream.