Conference Agenda

Green industrial policy has become the dominant approach to climate mitigation. Canada's clean technology investment tax credits, like the US Inflation Reduction Act and European Green Deal, direct substantial public resources toward clean energy investments. The underlying assumption is that making clean energy cheaper effectively reduces emissions. We show that the emission benefits of this approach are not guaranteed but depend on sectoral production characteristics, and that alternative investment strategies may be more effective. We develop a general equilibrium model where two intermediate sectors differ in process emission intensity and substitution flexibility between energy and non-energy inputs. When clean energy becomes cheaper, sectors respond asymmetrically. More flexible sectors substitute aggressively toward cheap energy, releasing other inputs that are absorbed elsewhere. The emission consequences depend on which sectors expand. We establish a clean energy paradox: if the dirtier sector is more flexible, clean energy investment increases aggregate emissions despite lowering the carbon intensity of energy use. In contrast, productivity improvements in lower-emission sectors unambiguously reduce emissions through a composition effect that does not depend on substitution elasticities. The results characterize conditions under which carbon pricing and cleaner-sector investment emerge as complements, both operating through reallocation mechanisms that shift production toward cleaner activities.