Factor-Eliminating Technical Change in a Resource Economy

The discovery of breakthrough technologies for renewable energy use in an increasing number of sectors brings about a type of technical change that decreases the output elasticity of fossil energy sources at the aggregate level, a mechanism that has largely been neglected in the literature. We propose a model of a resource economy constrained by a carbon budget that accounts for the invention of sector-specific clean backstop technologies. We find that this type of innovation leads to factor-eliminating technical change, which boosts renewable capital investments. With factor elimination, the economy converges to the neoclassical growth model in the long run, while in the short run carbon emissions and output growth are higher than with factor-augmenting technical change. Our model generalizes existing models of technical change in a resource economy