Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107819
Authors: 
van der Meijden, Gerard
Smulders, Sjak
Year of Publication: 
2014
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-100/VIII
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.
Subjects: 
Directed technical change
energy transition
multiple equilibria
JEL: 
O30
Q32
Q42
Q55
Document Type: 
Working Paper

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