Theory Workshop - Shane Mahen (Cambridge)

Title: The Clean Transition in a Network Economy

Abstract
Governments increasingly provide sector-level subsidies to support the adoption of clean technologies. I study how the structure and endogeneity of the production network mediate the effect of such policies on technology choices, total emissions, and aggregate output. I develop an analytically tractable model featuring multiple sectors, heterogeneous firms, endogenous technology choice, and climate damages. I provide a general characterisation of the impact of a sector-specific subsidy increase on aggregate output. This effect can be decomposed into damage-related and non-damage components: the former is the direct output effect of the change in emissions, while the latter measures the output effect of the change in technical and allocative efficiency given the level of damages. The existing network structure plays a crucial role in both components and policymakers should exploit this structure to identify interventions with the largest welfare improvements. Finally, I discuss several examples where well-meaning policies can, perversely, increase total emissions and reduce welfare.