Estimating the Macroeconomic Elasticity of Substitution Between Clean and Dirty Production

There is a growing consensus that innovation in ‘clean’, environment-friendly technologies is needed to prevent disastrous climate change without compromising economic growth. Clean innovation will only be effective if there are economic incentives to reallocate resources from dirty to clean production. These incentives may depend on economic policies but they also depend on the production structure of an economy.

A central parameter of the macroeconomic production structure is the elasticity of substitution between clean and dirty production. It plays a decisive role in macroeconomic models simulating the effect of environmental policy on climate and economic growth. Although related empirical research has been conducted on capital-energy and interfuel substitution, estimates of this parameter that can be used to calibrate macroeconomic models have not yet been produced. The goal of the project is to gain more precise empirical knowledge about this parameter based on sectoral and macroeconomic data.

(The views expressed in this project are the sole responsibility of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.)

Duration: April 2011 - September 2012

• Dr. Marianne Saam, ZEW – Leibniz Centre for European Economic Research Mannheim, Research Group Information and Communication Technologies
• Chris Papageorgiou, PhD, International Monetary Fund (IMF)