We argue that expectations about future energy use affect the transition from fossil to renewables because of an interaction between innovation and resource scarcity. This article presents a model of directed technical change to study this interaction. We find that fossil‐saving technical change erodes the incentives to implement renewables. Conversely, the anticipation of a transition to renewables diminishes the incentives to invest in fossil technology. As a result, two equilibria may arise, one with a transition to renewables and with low fossil efficiency and one without renewables and with high fossil efficiency. Expectations determine which equilibrium arises.
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Meijden et al. (2017) studied this question.
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