Innovation, Renewable Energy, and Macroeconomic Growth
Hartley, Peter R.; Medlock, Kenneth B. III; Temzelides, Ted; Zhang, Xinya
Many studies assume that the optimal size of research and development (R&D) in the energy sector is five to 10 times the current level. Is the energy sector under-investing in R&D? What would be the effects of subsidies to R&D in renewable energy on macroeconomic growth? There is an extensive ongoing policy discussion in the United States about innovations in the “green economy” and their potential to act as a new engine of economic growth. As the new administration devotes substantial resources to production and investment subsidies in the renewable energy and biofuels sector, it is important to evaluate the validity of such a strategy. In our model, energy is needed in order to produce the economy’s consumption good. We find that the economy goes through three distinct regimes. Initially, production uses only fossil fuel, and investment takes place in order to improve the efficiency of supplying fossil fuel. In the medium to long run, the price of fossil fuel inevitable increases, and the economy makes a transition to a renewable energy regime. Finally, in the very long run, a limit is reached after which renewable energy is produced at the lowest possible cost. We calibrate the model and examine how the transition to renewable energy is affected by imposing taxes on fossil fuel energy or by imposing subsidies to renewable energy R&D.