Avoiding carbon lock-in: Policy options for advancing structural change

Abstract

An obstacle for the transformation to a low-carbon economy is the carbon lock-in: fossil fuel-based ("dirty") technologies dominate the market although their carbon-free ("clean") alternatives are dynamically more efficient. We study the interaction of learning-by-doing spillovers with the substitution elasticity between a clean and a dirty sector to evaluate the robustness of policies averting the carbon lock-in. We find that the substitution possibilities between the two sectors have an ambivalent effect: although a high substitution elasticity requires less aggressive mitigation policies than a low one, it creates a greater welfare loss through the lock-in in the absence of regulation. The socially optimal policy response consists of a permanent carbon tax as well as a learning subsidy for clean technologies. We thus indicate that the policy implications of (Acemoglu, D., Aghion, P., Bursztyn, L., Hemous, D., 2012. The Environment and Directed Technical Change. American Economic Review 120 (1): 131-166), calling for merely temporary interventions based on the mechanism of directed technical change in the same setting, are limited in scope. Our results also highlight that infrastructure provision is crucial to facilitate the low-carbon transformation.

Environmental Policy and the Direction of Technical Change

“…The body of literature on directed technological change and the environment is steadily increasing in size; see Heutel and Fischer (2013) for an overview on macroeconomics and the environment. Several papers modify and simulate the AABH model, albeit in different directions and analysing other problems than in the present paper: Hourcade et al (2011) discuss parameter choices related to the climate part of the model; Mattauch et al (2015) add learning-by-doing effects to the framework; Durmaz and Schroyen (2013) extend the model by adding abatement technology (carbon capture and storage); and Hémous (2013) and van den Bijgaart (2015) extend the model to include more than one country and analyse unilateral environmental policies in a global context. Importantly, none of these papers explores profits from innovations that are retained until replaced by a better innovation, meaning that future emission policies affect innovation decisions today.…”

Abandoning Fossil Fuel: How Fast and How Much

“…Our analysis also pays careful attention to how fast and how much fossil fuel should be abandoned and how quickly and how much renewables should be phased in. Our results suggest a third way in climate policy which consists of a quick and aggressive path of upfront renewable subsidies to stimulate use of renewables and enjoy the fruits of learning by doing, combining the logic of direct technical change and kick-starting green innovation developed in Acemoglu et al (2012) and Mattauch et al (2012) with a gradually rising carbon tax as advocated in most integrated assessment studies including Nordhaus (2008Nordhaus ( , 2014, Stern (2007) and Dietz and Stern (2015).…”

“…Apart from carbon taxes, technological progress is thus an important factor in determining the optimal combination of fossil and renewable energy sources (cf. Acemoglu et al, 2012;Mattauch et al, 2012). We assume instantaneous and perfect spillover of learning.…”

Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox

“…Complete decarbonization requires substantial reductions in the cost of renewables versus that of fossil fuel. Apart from carbon taxes, technological progress is an important factor in determining the optimal combination of fossil and renewable energy sources (Acemoglu et al 2012;Mattauch et al 2012). We thus capture learning and lock-in effects by making the cost of renewables a decreasing function of past cumulated renewable energy production, b < 0 with B t = t s=0 R s .…”