Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322292 
Year of Publication: 
2025
Series/Report no.: 
Working Paper No. 450
Version Description: 
Revised version, June 2025
Publisher: 
University of Zurich, Department of Economics, Zurich
Abstract: 
We analyze a model of green technological transition along a supply chain. The model generates a unique equilibrium for given initial conditions but multiple steadystates. We show that: (i) even in the presence of Pigouvian environmental taxation, targeted sectoral subsidies are generally necessary to implement the social optimum; (ii) small, targeted industrial policy may bring large welfare gains; (iii) a government which is unable to subsidize greenification in more than one sector or price carbon at its true social cost should primarily target downstream sectors; (iv) overinvesting in greenification in the wrong upstream branch may derail the overall transition towards greenification. Finally, we calibrate our model to decarbonization of heavy duty transportation (trucking, aviation, etc.) via hydrogen. We find that, absent industrial policy, the economy can get stuck in the "wrong" steady-state with CO2 emissions vastly above the social optimum even with a Pigouvian carbon price in place.
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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