Tuesday, December 4, 2012

AGHION Philippe, DECHEZLEPRETRE Antoine, HEMOUS David, MARTIN Ralf, VAN REENEN John
Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry
INSEAD Working Paper 2012/124/EPS

Can directed technical change be used to combat climate change? We construct new firm-level panel data on auto industry innovation distinguishing between “dirty" (internal combustion engine) and “clean" (e.g. electric and hybrid) patents across 80 countries over several decades. We show that firms tend to innovate relatively more in clean technologies when they face higher tax-inclusive fuel prices. Furthermore, there is path dependence in the type of innovation both from aggregate spillovers and from the firm's own innovation history. Using our model we simulate the increases in carbon taxes needed to allow clean to overtake dirty technologies.