Promoting clean technologies under imperfect competition§

We develop a general equilibrium vintage capital model with energy-saving tech-nological progress and an explicit energy sector to study the impact of investment subsidies on equilibrium investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy con-suming and scrapping is endogenous. Two polar market structures are considered for the energy market, free entry and natural monopoly. First, it is shown that investment subsidies may induce a larger equilibrium investment into cleaner tech-nologies either under free entry or natural monopoly. However in the latter case, this happens if and only if the average cost is decreasing fast enough. Second, larger diffusion rates do not necessarily mean lower energy consumption at equilibrium, which may explain certain empirical observations. JEL Classification codes: O40; E22; Q40 Key words: Energy-saving technological progress; vintage capital; optimal scrap-ping; natural monopoly; investment subsidies § Financial support from the project ANR CEDEPTE n◦ANR-05-JCJC-0134-01 is gratefully ac-knowledged. Boucekkine also acknowledges support from the ARC project 09/14-018 on Sustainability