The Environment and Directed Technical Change
GAICIL Insights
Climate pessimism usually rests on a hidden assumption: that technology stays put while policy fights it.1 The Environment and Directed Technical Change, by Daron Acemoglu, Philippe Aghion, Leonardo Bursztyn and David Hemous, drops the assumption. It introduces endogenous and directed technical change into a growth model with environmental constraints and limited resources. The final good is produced from dirty and clean inputs, and innovation can be directed toward either.
One question to put to climate skeptics of growth and growth skeptics of climate policy alike: both may be underestimating how fast innovation turns once pushed. The expensive mistake may be waiting for a perfect permanent policy while a temporary, timely one would have done the job.
The results are optimistic and demanding at once. When inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxes and subsidies redirecting innovation toward clean inputs, without long-run distortions. Optimal policy involves both carbon taxes and research subsidies, so excessive use of carbon taxes can be avoided. Delay is costly: the sooner and stronger the response, the shorter the slow growth transition phase. And using an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when inputs are substitutes.
The striking conclusion: technology's response to policy yields a more optimistic scenario than models with exogenous technology. Environmental problems can be solved with temporary interventions, because once clean technologies are sufficiently advanced, innovation continues in the clean direction on its own. Long-run properties and optimal policies depend on input substitutability, on whether dirty production uses exhaustible resources and on initial environmental and resource stocks. Policy is a push to a boulder that then rolls by itself.
Directed technical change is the heart of it. Innovation responds to incentives, and policy can steer it. Once steered toward clean technologies, innovation builds on itself, making clean production increasingly competitive. Temporary policy can produce permanent change in technology's direction. The intervention ends; the trajectory persists.
Bring the result forward to the present. Artificial intelligence is steerable in the same way. Researchers and firms choose applications and methods under incentives. Temporary, well-designed policies can redirect innovation toward socially desirable directions, after which it may continue there on its own. Steering AI may call for a well-timed push, later relaxed.
AI can also accelerate the clean transition. AI tools can speed research on clean technologies, from materials to energy systems. If AI raises clean research productivity, it could shorten the transition and reduce the policy intervention needed for sustainable growth. AI could make the boulder lighter.
The tax-plus-subsidy combination is a design template. Taxes alone may need to be very high to redirect innovation. Pairing them with clean research subsidies achieves redirection more efficiently. For AI policy, similar combinations may steer innovation toward desired outcomes, such as energy efficiency or safety, at lower cost. A stick alone must be huge; a stick with a carrot can be modest.
Delay is the cardinal sin. The sooner policy acts, the shorter the transition. Because innovation builds on past innovation, delay lets dirty technology advance further, making the eventual switch harder. In AI, early choices about research direction may similarly shape the field for years, making timely policy more effective. Every year of waiting raises the price of changing course.
Substitutability matters. When clean and dirty inputs are substitutes, temporary policy suffices, so investing in clean technologies that can substitute for dirty ones is valuable. AI can help develop such substitutes, raising environmental policy's effectiveness.
Translated into policy, the message is constructive. Innovation can be harnessed to solve environmental problems, and interventions may be temporary if timely and well designed. This optimism, grounded in a rigorous model, supports action combining pricing with research support.
Stepping back, technology responds to policy, and well-designed temporary interventions can redirect innovation permanently. Carbon taxes and research subsidies together steer innovation toward clean inputs, and the sooner they act, the better. As AI becomes a powerful research tool, it may amplify such policies' effectiveness, accelerating the transition to sustainable growth.
Introduction
This paper introduces endogenous and directed technical change in a growth model with environmental constraints. The final good is produced from “dirty” and “clean” inputs. We show that: (i) when inputs are sufficiently substitutable, sustainable growth can be achieved with temporary taxes/subsidies that redirect innovation toward clean inputs; (ii) optimal policy involves both “carbon taxes” and research subsidies, avoiding excessive use of carbon taxes; (iii) delay in intervention is costly, as it later necessitates a longer transition phase with slow growth; and (iv) use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire. (JEL O33, O44, Q30, Q54, Q56, Q58)
Takeaway
In this paper we introduced endogenous directed technical change in a growth model with environmental constraints and limited resources. We characterized the structure of equilibria and the dynamic tax/subsidy policies that achieve sustainable growth or maximize intertemporal welfare. Both the long-run properties of the equilibrium and optimal policies (or the necessary policies to avoid environmental disaster) are related to the degree of substitutability between clean and dirty inputs, to whether dirty input production uses exhaustible resources, and to initial environmental and resource stocks. The main implications of factoring in the importance of directed technical change are as follows: (i) when the inputs are sufficiently substitutable, sustainable long-run growth can be achieved using temporary policy intervention (e.g., a temporary research subsidy to the clean sector), and need not involve long-run distortions; (ii) optimal policy involves both “carbon taxes” and research subsidies, so that excessive use of carbon taxes can be avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Thus the response of technology to policy leads to a more optimistic scenario than that emerges from models of with exogenous technology; in particular, environmental problems can be solved with only temporary intervention and without causing major long-run distortions.1
However, directed technical change also calls for immediate and decisive action in contrast to the implications of several exogenous technology models used in previous economic analyses. A simple quantitative evaluation suggests that, provided that elasticity of substitution between clean and dirty inputs is sufficiently high, optimal environmental regulation should involve an immediate switch of R&D resources to clean technology, followed by essentially all production switching to clean inputs. This conclusion appears robust to the range of discount rates used in the Stern report and in Nordhaus’s work (which lead to very different policy conclusions in models with exogenous technology). Interestingly, in most cases, optimal environmental regulation involves small carbon taxes because research subsidies are able to redirect innovation to clean technologies before there is more extensive environmental damage. Our paper is a first step towards a comprehensive framework that can be used for theoretical and quantitative analysis of environmental regulation with endogenous technology. Several directions of future research appear fruitful. First, it would be useful to develop a more detailed multi-country model with endogenous technology and environmental constraints, which can be used to discuss issues of global policy coordination and the degree to which international trade should be linked to environmental policies.
Notes
- Daron Acemoglu et al., The Environment and Directed Technical Change, 102 Am. Econ. Rev. 131 (2012), https://doi.org/10.1257/aer.102.1.131. Takeaway source: Conclusion, reproduced from a free author or repository copy (working-paper version). ↩
Cite as: Daron Acemoglu et al., The Environment and Directed Technical Change, 102 Am. Econ. Rev. 131 (2012), https://doi.org/10.1257/aer.102.1.131
Header image: 20110504-RD-LSC-0606 - Flickr - USDAgov.jpg by U.S. Department of Agriculture, CC BY 2.0, via Wikimedia Commons.
