Learning or lock-in: optimal technology policies to support mitigation

Learning or lock-in: optimal technology policies to support mitigation / M.Kalkuhl, O. Edenhofer, K. Lessmann. Resource and Energy Economics, 34(1), 1–23, Jan. 2012 [doi:10.1016/j.reseneeco.2011.08.001] (online first)

draft : http://www.pik-potsdam.de/~kalkuhl/working-paper/learning-or-lock-in.pdf

link to the journal : http://www.sciencedirect.com/science/article/pii/S0928765511000479

We investigate conditions that amplify market failures in energy innovations, and suggest optimal policy instruments to address them. Using an intertemporal general equilibrium model we show that “small” market imperfections may trigger a several decades lasting dominance of an incumbent energy technology over a dynamically more efficient competitor, given that the technologies are very good substitutes. Such a “lock-in” into an inferior technology causes significantly higher welfare losses than market failure alone, notably under ambitious mitigation targets. More than other innovative industries, energy markets are prone to these lock-ins because electricity from di erent technologies is an almost perfect substitute. To guide government intervention, we compare welfare-maximizing technology policies including subsidies, quotas, and taxes with regard to their efficiency, e ectivity, and robustness. Technology quotas and feed-intari s turn out to be only insignificantly less efficient than first-best subsidies and seem to be more robust against small perturbations. (© the authors)

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