This paper introduces endogenous and directed technical change in a growth model with environmental constraints. The final good is produced from "dirty" and "clean" inputs. The authors show that when inputs are sufficiently substitutable, sustainable growth can be achieved with temporary taxes/subsidies that redirect innovation toward clean inputs. Optimal policy involves both "carbon taxes" and research subsidies, avoiding excessive use of carbon taxes. Delay in intervention is costly, as it later necessitates a longer transition phase with slow growth. Use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire. The paper addresses how to control and limit climate change caused by fossil fuel consumption and develop alternative energy sources. While much of the climate science discussion focuses on alternative energy sources, technological change's response to environmental policy has received little attention. Existing empirical evidence indicates that changes in the relative price of energy inputs affect the types of technologies developed and adopted. The authors propose a simple two-sector model of directed technical change to study the response of different technologies to environmental policies. A unique final good is produced by combining inputs from these two sectors. One sector uses "dirty" machines, creating environmental degradation. Profit-maximizing researchers build on previous innovations and direct research to improve machine quality in one or the other sector. The model highlights the roles of market size and price effects on technical change direction. The market size effect encourages innovation towards the larger input sector, while the price effect directs innovation towards the sector with higher prices. The relative magnitudes of these effects depend on three factors: the elasticity of substitution between the two sectors, the relative levels of development of the technologies, and whether dirty inputs are produced using an exhaustible resource. The authors show that the decentralized equilibrium is not optimal, and the laissez-faire equilibrium leads to an "environmental disaster." The paper discusses different policy responses, including the Nordhaus, Stern, and Greenpeace answers. The authors argue that immediate and decisive intervention is necessary when the two sectors are highly substitutable. Optimal environmental regulation, or even simple suboptimal policies, can redirect technical change and avoid an environmental disaster. The paper also illustrates the effects of exhaustibility of resources on the laissez-faire equilibrium and optimal policy. When the dirty sector uses an exhaustible resource, the price increase reduces its use, encouraging research towards clean technologies. The structure of optimal environmental regulation is similar to the case without an exhaustible resource, relying on both carbon taxes and research subsidies. The authors provide a quantitative example showing that for high elasticities of substitution between clean and dirty inputs, the optimal policy involves an immediate switch of research and development to clean technologies. The structure of optimal environmental policy is robust to different discount rates. The paper relates to the literature on growth, resources, and the environment, showing that environmental constraints can create an endogenous limit to growth. The authors also discuss the implications of different modeling assumptions, including the direct impact of environmentalThis paper introduces endogenous and directed technical change in a growth model with environmental constraints. The final good is produced from "dirty" and "clean" inputs. The authors show that when inputs are sufficiently substitutable, sustainable growth can be achieved with temporary taxes/subsidies that redirect innovation toward clean inputs. Optimal policy involves both "carbon taxes" and research subsidies, avoiding excessive use of carbon taxes. Delay in intervention is costly, as it later necessitates a longer transition phase with slow growth. Use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire. The paper addresses how to control and limit climate change caused by fossil fuel consumption and develop alternative energy sources. While much of the climate science discussion focuses on alternative energy sources, technological change's response to environmental policy has received little attention. Existing empirical evidence indicates that changes in the relative price of energy inputs affect the types of technologies developed and adopted. The authors propose a simple two-sector model of directed technical change to study the response of different technologies to environmental policies. A unique final good is produced by combining inputs from these two sectors. One sector uses "dirty" machines, creating environmental degradation. Profit-maximizing researchers build on previous innovations and direct research to improve machine quality in one or the other sector. The model highlights the roles of market size and price effects on technical change direction. The market size effect encourages innovation towards the larger input sector, while the price effect directs innovation towards the sector with higher prices. The relative magnitudes of these effects depend on three factors: the elasticity of substitution between the two sectors, the relative levels of development of the technologies, and whether dirty inputs are produced using an exhaustible resource. The authors show that the decentralized equilibrium is not optimal, and the laissez-faire equilibrium leads to an "environmental disaster." The paper discusses different policy responses, including the Nordhaus, Stern, and Greenpeace answers. The authors argue that immediate and decisive intervention is necessary when the two sectors are highly substitutable. Optimal environmental regulation, or even simple suboptimal policies, can redirect technical change and avoid an environmental disaster. The paper also illustrates the effects of exhaustibility of resources on the laissez-faire equilibrium and optimal policy. When the dirty sector uses an exhaustible resource, the price increase reduces its use, encouraging research towards clean technologies. The structure of optimal environmental regulation is similar to the case without an exhaustible resource, relying on both carbon taxes and research subsidies. The authors provide a quantitative example showing that for high elasticities of substitution between clean and dirty inputs, the optimal policy involves an immediate switch of research and development to clean technologies. The structure of optimal environmental policy is robust to different discount rates. The paper relates to the literature on growth, resources, and the environment, showing that environmental constraints can create an endogenous limit to growth. The authors also discuss the implications of different modeling assumptions, including the direct impact of environmental