Disequilibrium, 'Lock-in' and Potential Double Dividends: The Case of Distributed Combined Heat and Power (DCHP)

Ayres, R.U. (2005). Disequilibrium, 'Lock-in' and Potential Double Dividends: The Case of Distributed Combined Heat and Power (DCHP). IIASA Interim Report. IIASA, Laxenburg, Austria: IR-05-042

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Abstract

This paper addresses the potential for so-called 'double dividends', a possibility still largely dismissed by economists and, consequently by policy-makers. To come to grips with this question, the paper begins with a discussion of the notion of competitive equilibrium. This is followed by a discussion of the link between disequilibrium and innovation, and the non-linear dynamics of competition between technologies with increasing returns, resulting in path-dependence. Increasing returns to adoption permit lock-in of inferior technologies due to economies of scale and experience. However, in time, the initial advantage can be lost due to further innovation. This, in turn, is largely responsible for the existence of opportunities for double dividends. Double dividends can result when technological progress enables a technology that was originally locked out to become competitive at a later time. The paper concludes with a detailed analysis of what is arguably the most important opportunity for double dividends in the US and world economy, namely overcoming the lock-in of the monopoly electric power distribution system. This would encourage wider application of co-generation and/or decentralized combined heat and power (CHP) technology, with dramatic reductions in costs, carbon dioxide output and improved overall system reliability.

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