Energy mix, technological change, and the environment

Abstract

This paper studies the relationship between the energy mix and the environment using a theoretical framework in which two alternative energy sources are considered: fossil fuels (dirty energy) and renewable energy (clean energy). We fnd that a positive aggregate productivity shock increases energy consumption and emissionsbut reduces energy intensity and emissions per unit of output as renewable energy consumption increases, that is, carbon emissions are procyclical but emissions per unit of output are countercyclical. Second, an energy efciency improvement provokes a “rebound efect” above 100% (the backfre efect), resulting in a rise of pollutant emissions by increasing energy use. Third, a technological improvement in emissions leads to a reduction in emissions per unit of fossil fuel, but also implies a slow-down in the adoption of renewable energy sources. Finally, we consider the case of a decentralized economy in which the government chooses an optimal specific tax on fossil fuel to maximize social welfare. We show that the “second-best” policy is highly efective in correcting the negative efects of the environmental externality and able to almost achive the centralized economy outcome.