Optimal climate policy with directed technical change, extensive margins and decreasing substitutability between clean and dirty energy

This paper uses a benchmark climate model with endogenous technical change to
consider the effects of three extensions on optimal policy under a clean transition. First,
the movement of workers between non-energy and energy sectors lowers the cost of
abatement by more than an order of magnitude, favouring taxes over subsidies. Second,
the free movement of researchers between non-energy and energy sectors increases
the power of policy to avert environmental disaster and leads to a period of intense
research in the clean sector above the long-run share, as productivity in the clean sector
catches up to the non-energy sector. Third, a decreasing elasticity of substitution
between clean and dirty inputs as the share of clean energy rises is considered,
reflecting the increasing difficulty of integrating intermittent clean energy supply in
electricity. A decreasing elasticity increases the initial optimal tax on dirty energy and
therefore lowers the subsidies required to direct technical change towards clean energy.