Technological change as endogenous and interactive with patterns of

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Energy efficiency is not technological opportunity limited by social, regulatory or political factors. This bold statement is designed to emphasize the point that technological change and energy efficiency are an integrated and endogenous aspect of the design and operation of economic activities. Future efficient technologies (and their successful commercialization) will be as much a consequence of energy prices, social attitudes about environmental issues and political energy priorities as of envisaged and hypothesized potential technical efficiencies.

In a system, a resource constraint can be solved both by innovation in how a technology is used to derive services from the resource and by innovations making additional resources or equipment available. Forces capable of motivating technological change bringing greater energy efficiency are also capable of motivating technological change making more energy available. There is no inherent reason a system's dynamics automatically work to promote efficiency.

4.6.2 Path dependence

Due to shorter-term considerations, a society can be "locked-in" to a technology that is inferior (e.g., in energy use) in the longer term. Thus, path dependencies are important. To illustrate path dependence or technology lock-in, take the example of a decision-maker considering whether to invest in an old or a new technology which provide the same service but at different costs and efficiencies. The decision-maker may find it more profitable in the short run to invest in "old" technologies. But from a societal perspective, investments in alternative technologies may turn out to be only slightly more costly. Further, switching to the new efficient technologies will result in the accumulation of much experience in these technologies, and consequently much lower costs associated with their use. Future attempts to switch to more efficient technologies will undoubtedly cost significantly more to society, due to the missed opportunity to join the learning curve for these technologies with its associated improvement in product performance and reduction in costs (Arthur, 1987). The risk of technology lock-in in general is analyzed in a paper by Ayres & Martinas (1992). Additionally, in his analysis of the QWERTY keyboard, David (1985) shows that expectations of future market share and performance become key parameters in the lock-in of technologies. Lastly, the importance of a sponsoring firm or organization of a technology is important, as this can determine whether current or future performance will predict the dominance of the technology (Katz and Shapiro, 1986).

From the viewpoint of a decision-maker, an efficient option can only be chosen if it is commercially available. On this basis, several commentators (see e.g., Harvey, 1998) have argued that climate policy should focus more research into energy efficient technologies. Through a learning process, products can improve their efficiency and reduce their costs as they travel down the experience curve. This would allow future decision-makers to have the option of an efficient technology to cost-effectively meet their needs, and is especially valuable when considering the slow turnover of capital (50 years for residential housing, for example). Such a proactive strategy would have wide-ranging implications for energy efficiency over the next 100 years.

Another illustration of path dependence and efficient technologies is given in a series of studies by Jaffe and colleagues where they estimate the role of performance standards and subsidies in the range of technologies offered to consumers (Jaffe and Stavins, 1995; Newell et al., 1999). They find that performance standards can motivate producers to remove their least efficient models, thus speeding the adoption and further development of new, efficient technologies. In combination with price-induced efficiency improvements, performance standards illustrate the importance of improving individual technologies for overall reductions in energy use.

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