Substitutability between Clean and Dirty Electricity Generation Under a Clean Transition

The elasticity of substitution between wind and solar inputs and dirty inputs in electricity is estimated to be 3 or more by fitting an aggregate production function to OECD panel data. Such a high elasticity is consistent with detailed electricity models which also predict that the substitutability decreases as the share of clean inputs rises, as integrating intermittent energy supply becomes increasingly difficult. A simple dispatch model of electricity generation demonstrates this characteristic. Decreasing substitutability may imply greater costs from regions adopting different carbon prices