The Environment and Directed Technical Change

This paper introduces endogenous and directed change in a growth model with environmental constraints. The final good is produced from "dirty" and "clean" inputs. The authors show that: (i) when inputs are sufficiently substitutable, sustainable growth can be achieved with temporary taxes/subsidies that redirect innovation towards clean inputs; (ii) optimal policy involves both "carbon taxes" and research subsidies, avoiding excessive use of carbon; (iii) delay in intervention is costly as it later necessitates a longer transition phase with slow growth; (iv) use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire.