Sjak Smulders – Carbon Lock-In: The role of expectations
Speaker: Sjak Smulders, Tilburg University
Part of the: Climate Change and Environment Research Seminar Series (RSS
The feasibility, speed, and economy-wide impact of the energy transition from fossil fuels to clean energy sources depend crucially on the rate and nature of technological change. This paper presents a model of directed technical change to study the interaction between innovation and the energy transition from a non-renewable resource to a backstop technology. We find that resource-saving technical change erodes the incentives to implement the backstop technology. Conversely, the anticipation of the backstop being implemented in future diminishes the incentives to invest in resource-saving technology.
As a result, two dynamic equilibrium may arise, one with a transition to the backstop and low resource efficiency, and one without backstop deployment and fast efficiency improvements. Expectations determine which equilibrium arises in the decentralized market equilibrium. We characterize the transition paths and implications for economic growth.