The window of opportunity for effective climate change mitigation is

closing. Hence, it is decisive to understand how to accelerate the diffusion

of climate friendly technologies. Path dependence of technological change is

an explanation for sluggish diffusion even if a technology is superior in the

long run. This paper studies the determinants of diffusion, learning and the

coevolution of innovation and heterogeneous absorptive capacity. I show

how the effectiveness of different market based climate policies depends on

the type and strength of diffusion barriers.

I introduce a macroeconomic agent-based model that is an eco-technology

extended version Eurace@unibi model. Technology is heterogeneous by type

(green or brown). Firms choose between types when acquiring capital goods

and build up type-specific technological know-how that is needed to exploit

the productive potential of capital. Path dependence is operationalized as

accumulated diffusion barriers taking the form of inferior technical performance

of supplied green capital and type-specific know-how of adopters.

The barriers interrelate with positive feedback loops from market induced

innovation dynamics and learning by doing, and analyze how these mechanisms

explain path dependence and the emerging macroeconomic patterns

of technology diffusion. Environmental taxes can outweigh a lower technical

performance and subsidies perform better if lacking capabilities hinder firms

to adopt a sufficiently mature technology.