Carbon Lock-In: The Role of Expectations
Tinbergen Institute Discussion Paper 14-100/VIII
40 Pages Posted: 12 Aug 2014
Date Written: August 1, 2014
We argue that expectations about future energy use affect the transition from fossil fuels to renewable substitutes, because of an interaction between innovation and resource scarcity. The paper presents a model of directed technical change to study this interaction. We find that resource-saving technical change erodes the incentives to implement the substitute. Conversely, the anticipation of the substitute being implemented in the future diminishes the incentives to invest in resource-saving technology. As a result, two dynamic equilibria may arise, one with a transition to the substitute and with low resource efficiency, and one without the substitute and with fast efficiency improvements. Expectations determine which equilibrium arises in the decentralized market equilibrium. If multiple equilibria exist, the transition to the substitute generates higher welfare.
Keywords: directed technical change, energy transition, multiple equilibria
JEL Classification: O30, Q32, Q42, Q55
Suggested Citation: Suggested Citation