We analyze optimal subsidies for the replacement of durable assets in a model with heterogeneous producers, endogenous capital-embodied innovation, and environmental externalities that depend on capital vintages. We characterize the constrained-efficient allocation assuming a planner chooses capital replacement subject to the equilibrium evolution of innovation. Optimal subsidies equal the sum of two terms: (i) the difference in present discounted value of damages associated with old vs. new capital and (ii) the social value of innovation induced by capital replacement, net of the associated markup distortion. We generalize the analysis to the case of heterogeneous technologies. We calibrate the model using evidence on aircraft, vehicles, and aggregate investment. Initially, the optimal transition features an investment spike, which comes at the cost of consumption; optimal subsidies are steeply increasing in the age of the replaced asset.