Innovation-Led Transitions in Energy Supply
64 Pages Posted: 24 May 2017
Date Written: May 2017
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.
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