Innovation-Led Transitions in Energy Supply

Abstract

I generalize a benchmark model of directed technical change in order to reconcile it with the historical experience of energy transitions. I show that the economy becomes increasingly locked-in to the dominant energy source when machines and energy resources are substitutes, but a transition away from the dominant energy source is possible when machines and energy resources are complements. Consistent with history, a transition in research activity leads any transition in resource supply. A calibrated numerical implementation shows that innovation is critical to climate change policy. A policymaker uses a temporary research subsidy to permanently redirect innovation towards low-emission resources, avoiding much more warming than would a policymaker restricted to an emission tax instrument.

Keywords: directed technical change, complementarities, lock-in, path dependency, energy, climate, greenhouse gas, carbon

JEL Classification: N70, O31, O38, Q41, Q55