Transition to Green Technology along the Supply Chain

We develop a dynamic model of green technological transition along supply chains, with a unique equilibrium and multiple steady-states. Even with Pigouvian environmental taxation, targeted sectoral subsidies are generally needed to reach the social optimum. A government constrained to small subsidies or below-social-cost carbon prices should target downstream sectors. With strategic complementarity in greenification, subsidies (weakly) raise welfare; under strategic substitutability, subsidizing greenification in a sector whose output mainly feeds dirty downstream production can derail the transition. Calibrating the model to the long-range heavy-duty transport sector, we find that Pigouvian carbon pricing alone is insufficient to escape a low-greenification trap.

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