Qixiang Gao

Job Market Paper

Greening the Production

• Abstract: Using global firm level environmental expenditure data from 2002 to 2024, I study how firms accumulate clean capital and increase its substitutability with dirty capital. The clean share of physical capital rises from below 1% to nearly 10%. Under a balanced productivity CES benchmark, the two capital stocks are gross substitutes, with substitutability varying across industries and rising over time. Allowing for unbalanced productivity, clean investment and the installed clean capital share predict jumps in relative clean marginal productivity. I develop and estimate a dynamic model that jointly endogenizes clean productivity growth and the elasticity of substitution. The two channels reinforce one another, implying that the green transition reshapes not only capital allocation but also the production technology itself. Policies like carbon pricing and clean financing become substantially more effective when the elasticity of substitution is endogenous.