Aggregate Economic Implications of New Technologies in Energy Industry

This thesis studies technological progress in the energy sector and the transition path from fossil fuels to renewable energy, with a particular emphasis on the conse- quences to the whole economy. Currently, there is an active discussion regarding sub- sidizing renewable energy sources, which are often portrayed as the sole future source of energy and the driver of significant employment and economic growth. However, innovation in the fossil fuel sector and its continuing development can also be a game changer and should not be ignored. In the first chapter, we use a dynamic general equilibrium model with endogenous technological progress in energy production to study the optimal transition from fossil fuels to renewable energy in a neoclassical growth economy. We emphasize the importance of modeling technology innovation in the fossil fuel sector, as well as in the renewable energy industry. Advancements in the development of shale oil and gas increase the supply of fossil fuel. This implies that the "parity cost target" for renewables is a moving one. We believe that this important observation is often neglected in policy discussions. Our quantitative analysis finds that these advancements allow fossil fuels to remain competitive for a longer period of time. While technological breakthroughs in the fossil fuel sector have postponed the full transition to renewable energy, they have also created many jobs and stimulated local economies. In the third chapter, we use an econometric analysis to compare job creation in the shale gas and oil sectors with that in the wind power sector in Texas. The results show that shale development and well drilling activities have brought strong employment and wage growth to Texas, while the impact of wind industry development on employment and wages statewide has been either not statistically significant or quite small. The first and third chapters question the current enthusiasm in policy circles for only focusing on alternative energy. Chapter 2 provides some theoretical support for subsidizing renewable energy development. Here we develop a decentralized version of the model in Chapter 1 and allow for technological externalities. We analyze the efficiency of the competitive equilibrium solution and discuss in particular different scenarios whereby externalities can result in an inefficient outcome. We show that the decentralized economy with externalities leads to under-investment in R&D, lower investment and consumption, and delayed transition to the renewable economy. This may provide an opportunity for government action to improve private sector outcomes.