Directed technical change and environmental quality

We propose a directed technical change model with two sectors, clean and dirty, to analyze the impact of the degree of substitutability between sectors and the degree of scale effects on the environmental quality. The technological knowledge is biased towards the clean sector; i.e., the environmental quality is improved whenever the elasticity of substitution between inputs in both sectors increases and, along with that, the economy: (i) is rich in renewable capital, (ii) has higher relative supply of clean labor under scale effects, and (iii) enjoys higher relative R&D productivity in the clean sector. The improvement in the environmental quality benefits the welfare. Moreover, the growth rate is higher in the presence of scale effects.