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Technology Lock-In and Optimal Carbon Pricing

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. ∗We thank Jason Abaluck, Joe Altonji, Steve Berry, Matt Kotchen, Rohini Pande, Nick Ryan, Joe Shapiro, Stephanie Weber, and seminar participants at Arizona State University, Harvard, the Stanford Junior Faculty Lunch, the Stanford Institute for Economic Policy Research (SIEPR), and the UC Berkeley Energy Camp for helpful discussions, Andrew Tang and Benji Reade Malagueno for excellent research assistance, and the Cowles Foundation, the Yale Economic Growth Center, and SIEPR for funding. Any views expressed are those of the authors and not those of the U.S. Census Bureau. The Census Bureau’s Disclosure Review Board and Disclosure Avoidance Officers have reviewed this information product for unauthorized disclosure of confidential information and have approved the disclosure avoidance practices applied to this release. This research was performed at a Federal Statistical Research Data Center under FSRDC Project Number 2309. (Release numbers CBDRB-FY21-P2309-R8908 and CBDRB-FY21P2309-R9137) Contact: Hawkins-Pierot: jonathan.hawkins@yale.edu; Wagner: katherine.wagner@berkeley.edu.