The idea of government intervention to influence the composition of a country’s output has long been derided by economists for breeding inefficiency, reducing competition, encouraging lobbying and saddling countries with factories producing unwanted products. Likewise, environmental regulation is often seen as a barrier to growth.
However, supporting low-carbon technology could see the UK achieve long-term growth whilst significantly reducing the negative externalities associated with carbon emissions.
Theoretical models have shown that if a product is made using two substitutable inputs, one of which is “dirtier” but also cheaper than the other, then the market will not only tend to generate too much pollution but also produce a self-reinforcing cycle of innovation in the dirty product as researchers build on previous breakthroughs (American Economic Review, 2011).
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