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\van der Meijden\, G.C. and Smulders, S. (2017). Carbon Lock-In: The Role of Expectations International Economic Review, 58(4):1371--1415.

  • Journal
    International Economic Review
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We argue that expectations about future energy use affect the transition from fossil to renewables because of an interaction between innovation and resource scarcity. This article presents a model of directed technical change to study this interaction. We find that fossil-saving technical change erodes the incentives to implement renewables. Conversely, the anticipation of a transition to renewables diminishes the incentives to invest in fossil technology. As a result, two equilibria may arise, one with a transition to renewables and with low fossil efficiency and one without renewables and with high fossil efficiency. Expectations determine which equilibrium arises.