Carbon Lock-In: The Role of Expectations

Tinbergen Institute Discussion Paper 14-100/VIII

40 Pages Posted: 12 Aug 2014

See all articles by Gerard van der Meijden

Gerard van der Meijden

Vrije Universiteit Amsterdam, School of Business and Economics

Sjak Smulders

Tilburg University - Tilburg University School of Economics and Management; University of Calgary - Department of Economics

Date Written: August 1, 2014

Abstract

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

van der Meijden, Gerard and Smulders, Jacobus (Sjak) A., Carbon Lock-In: The Role of Expectations (August 1, 2014). Tinbergen Institute Discussion Paper 14-100/VIII. Available at SSRN: https://ssrn.com/abstract=2475876 or http://dx.doi.org/10.2139/ssrn.2475876

Gerard Van der Meijden (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Jacobus (Sjak) A. Smulders

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2920 (Phone)
+31 13 466 3042 (Fax)

HOME PAGE: http://www.uvt.nl/webwijs/english/show.html?anr=801585&lang=en

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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