How to accelerate green technology diffusion? Directed technological change in the presence of coevolving absorptive capacity

The time window for effective climate change mitigation is closing. Technological change needs to be accelerated to limit global warming to a manageable level. Path dependence of technological change is one explanation for sluggish diffusion of green technologies. Firms acquire capital that differs by technology type and build up type-specific technological know-how needed to use capital efficiently. Path dependence emerges from cumulative knowledge stocks manifested in the productivity of supplied capital and firms’ capabilities. Increasing returns arise from induced innovation feedbacks and learning by doing. Relatively lower endowments with technological knowledge are a barrier to diffusion for new technologies. This paper shows how the evolution of relative stocks of technological knowledge explains different shapes of diffusion curves. Using an eco-technology extension of the macroeconomic agent-based model Eurace@unibi, it is shown how the effectiveness of different climate policies depends on the type and strength of diffusion barriers. Environmental taxes can outweigh lower productivity and subsidies perform better if lacking capabilities hinder firms to adopt a sufficiently mature technology.