Climate Change, Directed Innovation, and Energy Transition: The Long-run Consequences of the Shale Gas Revolution

We investigate the short- and long-term effects of a natural gas boom in an economy where energy can be produced with coal, natural gas, or clean sources and the direction of  technology is endogenous. In the short run, a natural gas boom reduces carbon emissions by inducing substitution away from coal, but it also discourages innovation in clean energy. This delays and can even prevent the energy transition to zero carbon. We calibrate our model to the US electricity sector and find that the technology response to the shale gas boom results in a significant increase in long-run emissions. While the IRA can help the US economy avoid a
fossil-fuel trap, the natural gas boom leads to a decline of innovation in renewables for  decades even with the IRA. Overall, the shale gas boom reduces social welfare, whereas, combined with the appropriate policy responses, it could have increased welfare substantially.

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