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The degree of substitutability between clean and dirty energy plays a central role in leading economic analyses of optimal environmental policy. Despite the importance, assuming a constant and exogenous elasticity of substitution has been a dominant theoretical approach. We challenge this assumption by developing a dynamic general equilibrium model with an endogenous elasticity of substitution that interacts with the relative share of clean inputs in the economy. We find strong dynamic feedback effects arising from endogenous substitution capacity that amplifies the impact of directed technical change and accelerates the transition to a green economy. [ABSTRACT FROM AUTHOR]

Population growth has two potentially counteracting effects on pollution emissions: (i) more people imply more production and thereby more emissions, and (ii) more people imply a larger research capacity which might reduce the emission intensity of production, depending on the direction of research. This study investigates how to achieve a given climate goal in the presence of these two effects. A growth model featuring both directed technical change and population growth is developed. The model allows for simultaneous research in polluting and non-polluting technologies. Both analytical and numerical results indicate that population growth is a burden on the environment, even when all research efforts are directed toward non-polluting technologies. Thus, research subsidies alone cannot ensure environmental sustainability. Instead, the analysis highlights the importance of carbon taxes for climate change mitigation. [ABSTRACT FROM AUTHOR]