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Technological lock-in has been a standard explanation for the slow
take-off of clean innovation, but is hard to reconcile with forwardlooking
investors who anticipate the eventual switch to clean technologies.
We provide an alternative explanation: strategic investment complementarities
shape innovation and self-fulfilling prophecies can lead
to delayed low-carbon transition. We analyze a standard directed technical
change model with clean and dirty inputs. We find that when the
two are good substitutes, two stable steady states can co-exist, each allowing
multiple transitional paths. Optimal low-carbon transition requires
a Pigouvian tax rule combined with a coordination device; commitment
to a Pigouvian tax trajectory cannot solve a coordination failure.
