We propose a directed technical change model with two sectors, clean and
dirty, to analyze the impact of the degree of substitutability between sectors
and the degree of scale effects on the environmental quality. The technological
knowledge is biased towards the clean sector; i.e., the environmental quality is
improved whenever the elasticity of substitution between inputs in both sectors
increases and, along with that, the economy: (i) is rich in renewable capital,
(ii) has higher relative supply of clean labor under scale effects, and (iii) enjoys
higher relative R&D productivity in the clean sector. The improvement in the
environmental quality benefits the welfare. Moreover, the growth rate is higher
in the presence of scale effects.
