MANUSCRIPT
Abstract
We develop a methodology to estimate the aggregate elasticity of substitution between polluting and non-polluting energy. Exploiting variation in US states’ energy mixes, we estimate an elasticity of 0.59 — statistically closer to unity and significantly smaller than prior studies suggest. This implies that subsidies alone may be insufficient to achieve a long-run energy transition. A model linking aggregate and sectoral elasticities implies a technological elasticity of 0.72, with the transportation sector emerging as a key constraint on overall substitutability. We show that increases in clean energy shares do not significantly raise the aggregate elasticity unless sectoral elasticities rise.
Figure 5: Clean Energy Consumption vs Dirty Energy Prices.
Notes: The figure plots two series for the US: the log-difference in average energy prices between pollutant and non-pollutant sources, and the log-difference in energy consumption between clean and dirty energy. Both series are normalized to 100 in 2010 prior to the log transformation. As a proxy for clean energy prices, we use onshore wind LCOE estimates from International Renewable Energy Agency (2024); analogous results using photovoltaic estimates are shown in figure 13. All prices are adjusted for inflation.
Citation
Sousa, Rui, The Aggregate Green Elasticity of Substitution (May 22, 2025). Available at SSRN: https://ssrn.com/abstract=5265415
Bibtex:
@misc{sousa_green_2025,
author = {Sousa, Rui},
title = {The Aggregate Green Elasticity of Substitution},
year = {2025},
month = {May},
note = {SSRN Working Paper},
url = {https://ssrn.com/abstract=5265415}
}