Julien Dubois

This paper develops a unified framework to three forces in the energy transition. First, capital replacement refers to investment in new, more efficient processes, which affects the cost of transition and introduces path dependence in physical capital. Second, Directed Disembodied Technical Change (DDTC) captures innovation of new products or processes and determines long-run growth outcomes. Third, Embodied Technical Progress (ETP) reflects improvements in the efficiency of already-installed capital and plays a crucial role in the speed of transition. A key contribution is the introduction of a parameter that interpolates between putty–putty and putty–clay capital, thereby capturing the rigidity of installed capital and the scope for ex post substitution. Ignoring these frictions leads to quantitatively important biases: energy use and welfare costs during the transition can be underestimated by up to 10%.