How Clean Can We Get? Technological Change and Renewable Energy Use in Mexico, A General Equilibrium Perspective

Abstract

This study explores the impact of technological change and renewable energy adoption on Mexico's economy using a Computable General Equilibrium (CGE) model. As global concerns about climate change intensify, reducing carbon emissions has become a priority, but traditional CGE models often predict significant economic costs associated with fossil fuel restrictions. In this analysis, we modify the conventional CGE framework to incorporate increasing returns to scale and endogenously modeled technological change, reflecting the real-world diffusion of renewable energy technologies in developing countries like Mexico. By accounting for these factors, our model demonstrates that a combined policy of carbon taxation and renewable energy subsidies can achieve significant CO2 reductions without negatively impacting economic welfare. However, while the environmental benefits—such as reduced emissions of particulates, SO2, and NOx—are substantial, the overall welfare gains remain modest, and the policy's success depends on effective government implementation and potential trade impacts. These findings offer valuable insights for policymakers in Mexico and other developing nations seeking to balance economic growth with environmental sustainability through strategic carbon emission reduction policies.