Directed technical change and the potential fossil fuel technology trap

Achieving the climate targets set by the Paris Agreement and Sustainable Development Goal 13 requires a rapid global transition away from fossil fuels. However, for resource-rich nations, high export revenues create a complex trade-off between immediate economic gains and long-term sustainability. This paper investigates whether the profitability of fossil fuel exports induces a “fossil fuel technology trap”, where innovation resources are inefficiently locked into the extraction sector, hampering the necessary switch to clean energy. We develop a directed technical change model specifically calibrated for a small, open economy. The framework analyzes the transitional dynamics of R&D allocation between dirty and clean energy sectors under increasing extraction costs for dirty resources, reflecting the structural dilemmas facing resource-exporting emerging and developed economies during the critical transition period toward a carbon-neutral global market. Our results demonstrate that market forces alone fail to allocate R&D efficiently; the economy tends to over-invest in fossil fuel technologies to maximize short-term export rents, leading to welfare losses. To avoid this fossil fuel technology trap, our policy analysis suggests that governments must implement active R&D reallocation policies that favor clean innovation significantly earlier than market signals would suggest. • Using R&D to export more fossil fuels may create a fossil technology trap. • Reallocating R&D to clean energy removes the trap and boosts GDP. • Both subsidizing clean energy R&D and taxing fossil fuel extraction are needed.