Positive Tipping Points and Transitional Dynamics: Policies for the Green Transition

Using a dynamic model in which heterogenous consumers make forward-looking choices between brown and green durable goods, we establish conditions under which peer effects lead to multiple steady states and multiple equilibrium path. Policy, such as a green subsidy, needs to exceed a critical threshold level to achieve green transition, and even larger to increase welfare. We analyse the feasibility, speed, and cost of transition showing how they depend on the strength of peer effects, the value of emissions avoided, and on policy employed. Pigouvian policies internalising the externalities associated with climate damage and with peer effects may not be sufficient to lead to a green transition; even if they are, they may not yield net benefits given the costs of transition. Outcomes seem relatively insensitive to the exact form of policy measures, providing they exceed the critical threshold level.