CEP/STICERD Applications Seminars
Technology Lock-In and Optimal Carbon Pricing
Katherine Wagner (University of California, Berkeley), joint with Jonathan Hawkins-Pierot
Monday 14 March 2022 16:00 - 17:30
Many of our seminars and public events this year will continue as in person or as hybrid (online and in person) events. Please check our website listings and Twitter feed @STICERD_LSE for updates.
Unless otherwise specified, in-person seminars are open to the public.
Those unable to join the seminars in-person are welcome to participate via zoom if the event is hybrid.
About this event
This paper studies the implications of low energy prices today for energy efficiency and climate policy in the future. If adjustment costs mediate manufacturing plants’ responses to increases in energy prices, incumbents may be limited in their ability to re-optimize energy-inefficient production technologies chosen based on past market incentives. Using U.S. Census data and quasi-experimental variation in state energy prices, we first show that the initial electricity prices that manufacturing plants pay in their first year of operations are important determinants of long-run energy intensity. Plants that open when the prices of electricity and fossil fuel inputs into electricity are low consume more energy throughout their lifetime, regardless of current electricity prices. We then measure the relative contributions of initial productivity and capital adjustment frictions to creating this “technology lock-in” by estimating a model of plant input choices. We find that lock-in can be largely explained by persistent differences in the relative productivity of energy inputs chosen at entry. We discuss how these long-run effects of low entry-year energy prices increase the emissions costs of delayed action on carbon policy.