Technological Lock-in Due to Environmental Taxation

We study how a committed emission tax shapes the adoption of successively cleaner technologies that arrive over time under uncertainty. Environmental policy increasingly relies on carbon prices that are set in advance and held fixed while such technologies emerge, and we show that this very commitment can lock firms into an inferior technology. In a two-period model, technologies differ only in their fixed adoption cost and emission rate; a regulator commits to a uniform tax and firms choose whether and when to adopt. Under monopoly with perfect foresight, the regulator can induce adoption of the cleanest technology but is sometimes better off not doing so, when its environmental gain falls short of the adoption cost. Under imperfect information the commitment cuts both ways: under-estimating the likelihood of the cleanest technology sets the tax too low, so the firm waits and stalls on its initial technology, whereas over-estimating it sets the tax so high that adoption is blocked altogether. The misperception distorts only the first-period adoption margin, over a benefit–cost band whose width scales with the size of the error. Competition sharpens the trade-off. With symmetric firms a strictly higher tax is needed to trigger adoption, so competition unambiguously raises the cost of inducing a green transition - even though the welfare ranking of monopoly and duopoly remains ambiguous. When one firm enjoys an adoption-cost advantage, it eases adoption for its rival and relaxes the regulator’s problem, pointing to a role for targeted first-adopter support alongside the tax.