MANUSCRIPT
Abstract
I introduce a new empirical strategy to provide the first estimate of the aggregate elasticity of substitution between polluting and non-polluting energy. Exploiting variation in US states’ energy mixes, I estimate an elasticity of 0.50 — much lower than most calibrations assume. Gross complementarity between energy sources complicates the green transition and significantly raises the economic costs of climate change. Despite rapid clean energy adoption, I find no evidence of increasing substitutability over time. A bottom-up model mapping invariant sectoral elasticities to their aggregate counterpart supports this result. These findings underscore the need for policies targeting green energy’s economic suitability.
Figure 5: Clean Energy Consumption vs Dirty Energy Prices.
Notes: The figure plots the four-year moving average for two US time-series: the log-difference between average polluting and non-polluting energy prices, and the log-difference between total clean and dirty energy consumption. Both series are normalized to 0 in 2004. As a proxy for clean energy prices, I use onshore wind LCOE estimates for new power plants in the US from International Renewable Energy Agency (2024); analogous results using photovoltaic estimates are shown in figure 12 of the supplemental appendix. All prices are adjusted for inflation.
Citation
Sousa, Rui, The Aggregate Green Elasticity of Substitution (May 23, 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}
}