Environmental Policies and Directed Technological Change in Electricity Generation

This paper evaluates the role of environmental policies and market forces at directing innovation from fossil-fuel to renewable-energy technologies in the electricity sector. We empirically test a directed technological change model of electricity using a global, firm-level electricity patent database from 1978 to 2011. We find that research subsidies for renewable technologies reduce the innovation gap between fossil fuel and renewable technologies while research subsidies for efficiency-improving fossil-fuel technologies encourage new research in all types of technology. Moreover, we find that coal and electricity prices affect innovation in a non-linear manner, therefore, a flexible energy tax regime is important to effectively reduce the innovation gap between fossil fuel and renewable energy in the electricity sector.