# 14-100/VIII (2014-08-01; 2016-07-14)

Gerard van der Meijden, VU University Amsterdam; Sjak Smulders, Tilburg University, the Netherlands
Directed technical change, energy transition, multiple equilibria
JEL codes:
O30, Q32, Q42, Q55

We argue that expectations about future energy use affect the transition from fossil to renewables, 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 fossil-saving technical change erodes the incentives to implement the 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 in equilibrium.