INVITED PAPER — DIRTY INPUTS IN POWER PRODUCTION AND ITS CLEAN UP: A SIMPLE MODEL

Abstract

This paper develops a model in which a country, which only has access to a dirty technology for producing electric power in the short run, looks to expand its production in the long run by only permitting new power plants based on clean technology. The model mimics current reality in which major developing countries are being pushed by factors, such as the Paris Climate agreement of 2015 and the large burden of mortality and morbidity resulting from use of fossil fuels, to rely more on clean technologies. Our model shows how emissions and emission intensity of power output after the adoption of clean technologies are increasing in the targets for power production set by the government before availability of such technology and supply variables such as the wage rate and expenses on fixed capital, and decreasing in the tax on power production before the availability of clean technologies. Finally, it is seen that for low enough cost of the clean resource input, a country with a higher demand is able to set a higher target for production with the dirty technology when the clean technology is not available and yet achieves lower emissions and emission intensity in the long run.