Input factor substitution under climate-neutral pathways

Achieving climate neutrality will require clean alternatives to entirely replace fossil technologies in most economic sectors. However, standard Computable General Equilibrium (CGE) frameworks, which are widely used to analyse climate policies and rely on nested Constant Elasticity of Substitution (CES) functions, are not well suited for simulating the full technological substitution implicit in deep decarbonization scenarios. This study presents an alternative modelling procedure, based on the logistic distribution, to overcome the “stickiness” of technological diffusion under CES functional forms. Deep decarbonization scenarios are simulated with a large-scale recursive-dynamic international CGE model to illustrate the advantages of the suggested approach.