Speeding Up the Clean Energy Transition

Despite the rapid growth in clean energy investments and deployment, the transition away from fossil fuels remains relatively slow and endangers net zero climate targets. A two-sector model of an economy explores how decentralized compared to socially optimal decision-making might lead to a slower clean energy transition. One sector employs a new technology that uses clean energy, which must be learned before spreading across all firms. The second sector uses a familiar carbon-intensive technology with no spillovers but generates greenhouse gas emissions and pollution. In the decentralized economy, knowledge spillovers and environmental damage are ignored, whereas a social planner accounts for both externalities. When decision-making is decentralized, compared to the socially optimal outcome, growth in per capita consumption of clean energy goods and services may be too low, whereas growth in per capita consumption of carbon-intensive products is too high. Speeding up the transition requires both pricing the environmental damage associated with fossil fuels and public support for clean energy innovation. However, current progress on these policies is mixed, and clean energy use is not increasing fast enough to meet future energy demand. The result could be more of a clean energy “addition” to using fossil fuels rather than a “transition” away from them.