This article presents a sequential decision approach to study
investments in environmentally dirty and clean technologies. We develop
two models and compare the results to check for robustness. After
showing how the system can converge to lock-in into an undesirable dirty
technology, we examine the effects of recombinant innovation of the
existing technologies. A mechanism of endogenous competition is
described involving a positive externality of increasing returns to
investment. Increasing returns are counterbalanced by recombinant
innovation, which is a force characterized by a negative or positive
externality depending on the dynamics of the system. We find conditions
in which lock-in can be avoided or escaped. Finally we study the
symmetry breaking of an environmental policy that charges a price for
polluting. We evaluate if and how an economy locked into a dirty
technology can be unlocked and move towards the clean technology. In
addition, we compare the cumulative pollution output of different
scenarios, so that we can evaluate the most attractive policy from an
environmental angle, irrespective of whether escape from dirty
technology occurs at all, or occurs early or late.