Renewable technology adoption costs and economic growth*

In the presence of rapid technological progress, early technology adoption may result in large capital replacement costs. We develop an analytical Integrated Assessment Model that incorporates endogenous scrapping costs resulting from new technology adoption in renewable energy, as well as externalities associated with carbon emissions and renewable technology spillovers. We use our calibrated model to investigate the effects of the scrapping channel on renewable technology adoption and on the optimal energy transition. In the absence of a Pigouvian carbon tax, a second-best policy that incentivizes renewables through internalizing spillovers provides relatively small benefits and can even be detrimental to short-run growth. In contrast, the reduction in fossil fuel consumption resulting from internalizing technology spillovers is significantly larger if the Pigouvian tax is also in place. Comparing the status quo to the scenario where both policies are implemented results in a consumption-equivalent welfare gain of 1.4 percent. Our findings suggest that, in the presence of scrapping costs resulting from rapid technological progress, some caution might be warranted before concluding that direct subsidies are a suitable substitute for a Pigouvian carbon tax. When it comes to social welfare, carbon taxes and policies that promote renewables by eliminating spillover externalities are best thought of as complements rather than substitutes.