Quo vadis? Energy consumption and technological innovation

Abstract

Whether China maintains its business-as-usual energy-intensive growth trajectory or changes to a sustainable development alternative has significant implications for global energy and climate governance. This paper is motivated to theoretically examine China's potential transition from its energy-intensive status quo to an innovation-oriented growth prospect. We develop an economic growth model that incorporates the endogenous mechanism of technological innovation and its interaction with fossil energy use and the environment. We find that from an initial condition with a pristine environment and a small amount of capital installation, the higher dynamic benefits of physical investment will incentivize the investment in physical capital rather than R&D-related innovation. Accumulation of the energy-consuming capital thus leads to an intensive use of fossil energy - an energy-intensive growth pattern. But if the mechanism of R&D-related innovation is introduced into the economy, until the dynamic benefit of R&D is equalized with that of capital investment, the economy embarks on R&D for innovation. As a result, the economy will evolve along an innovation-oriented balanced growth path where consumption, physical capital and technology all grow, fossil energy consumptions decline, and environmental quality improves.