Julien Dubois

Can growth and emissions be decoupled, and if so, through which mechanism? This paper develops a framework in which three forces drive the energy transition: (i) capital installation, where investment in cleaner vintages reduces emission intensity; (ii) Directed Disembodied Technical Change (DDTC), where R&D shifts the production frontier; and (iii) post-installation adjustment, where already-installed capital adapts its emission intensity over time. The third force is typically omitted from the literature, which treats capital as either fully rigid or fully flexible after installation. I capture it through a parameter $\theta\in[0,1]$ measuring the intensity of post-installation adjustment frictions. Studying the decentralized economy, I show that the transition is shaped by three market failures. Each requires its own instrument: a monopoly markup on R&D intermediates, an intertemporal knowledge spillover, and a novel Scrapping Delay Effect (SDE), by which directed innovation endogenously delays the scrapping of emission-intensive vintages. A scrapping subsidy $\sigma_t$ is necessary to correct the SDE; no direction subsidy can replace it, and it vanishes in the putty-putty limit. Quantitatively, Bayesian estimation on U.S. data (1949–2024) shows that the assumed value of $\theta$ alone drives the estimated elasticity of substitution from near zero to near unity, illustrating how the modelling assumption determines which mechanism appears as the primary driver of the transition.