Directing Technical Change from Fossil-Fuel to Renewable Energy - PowerPoint PPT Presentation

. . Directing Technical Change from Fossil-Fuel to Renewable Energy Innovation An Empirical Investigation Using Patent Data . . . . . Joëlle Noailly a and Roger Smeets b a CPB Netherlands Bureau for Economic Policy Analysis b University of Amsterdam, the Netherlands University of Geneva January 24, 2012 J.Noailly@cpb.nl . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 1 / 18

Outline Outline . . . Motivation 1 . . . Objective 2 . . . Data 3 . . . Empirical strategy and Results 4 . . . Conclusions 5 . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 2 / 18

Motivation Motivation Stern Review (2007): global average temperatures >2 o C by 2035, possibly >5 o C by 2100. “Effective action (...) requires a widespread shift to new technology in key sectors such as electricity generation.” (Stern Review, 2007, p. 393) Fuel shares of world’s electricity generation Electricity generation (IEA, 2010): 41% of world CO2 emissions. 70% of world’s electricity based on fossil-fuels. 19% on renewables. Source: IEA, 2010, Key World Energy statistics . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 3 / 18

Motivation Motivation Key challenge is to tackle fossil fuels dependency ⇒ shift away from fossil fuels (FF) towards renewable (REN) energy (Hoffert et al., Science, 2002) . Innovation is key to reduce the costs of REN technologies. Source: IEA, 2011, Projecting costs of electricity generation. . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 4 / 18

Motivation Motivation How do we induce more innovation in renewable technologies? 2 market failures. (Jaffe et al., 2005) Environmental externality Knowledge externatily Path-dependency in innovation firms that have innovated a lot in dirty technologies in the past will continue to do so (lock-in). Recent theoretical work by Acemoglu et al. (2011): Model of directed technical change → research is directed to most profitable sector Path-dependent innovation → past advances in dirty technologies make future clean innovation less profitable Optimal policy mix → carbon tax + directed research subsidies for the clean sector. Towards Green Industrial Policy? . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 5 / 18

Motivation Green Industrial Policy? Can the government pick up winners? Edward Glaeser (New York Times, January 2011) “Evergreen Solar’s move to China was supported by a $33 million loan from the Chinese government. Japan’s success in the 1980s was also attributed to its activist industrial policy, but subsequent research found that government subsidies backed losers more often than winners . For each effective government intervention, there have been dozens, even hundreds, of failures, where public expenditures bore no fruit.” Philippe Aghion (voxEU.org, November 2010) “I think it was good that economists in the past 20 years have pointed to the downsides of the top down pick winner policy. Does it mean you should have no sectoral policy? I believe not because we know that under laissez faire if you don’t intervene, firms will innovate dirty. So you have to step in and say we will induce you to innovate clean.” . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 6 / 18

Objective Objective Research question: What are the factors that induce firms to shift away from fossil fuels towards renewable innovation? ⇒ How important is path-dependency? Design: Empirical analysis of the factors affecting the direction of innovation in the electricity generation sector. Patents in REN and FF technologies for 7,000 European firms over 1978-2006 3 factors: fuel prices, market size and past knowledge stock (Acemoglu et al., 2009) Key results: Strong empirical evidence for path-dependency in innovation (especially for large firms with a long history of FF innovation) Gives support to Aghion’s view . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 7 / 18

Objective Literature Empirical literature on the determinants of environmental innovations (Popp, 2002; Johnstone et al, 2010; Hascic et al, 2009; Noailly, 2011) Popp (2002) US patent data in 11 energy technologies 1970-1994 Impact of past knowledge stock > energy prices Aghion et al. (2011) Compare factors affecting clean vs. dirty innovation Focus on automobile industry Path-dependency in innovation Our contribution: Focus on electricity generation Analysis for different types of firms (specialized and mixed firms) . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 8 / 18

Data Data: Patents 7,000 European firms over 1978-2006 Innovation measured by patents filed at European Patent Office + 17 national offices Sources: PATSTAT (EPO), matched at firm level using the HAN database (OECD). Patents identified using International Patent Classification codes (Lanzi et al, 2010; Hascic et al, 2009) REN: solar, wind, marine, hydro, geothermal, biomass and waste FF: steam engines plants, gas turbines plants, hot-gas, steam generation, burners, furnaces and ignition engines . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 9 / 18

Data Data: Patent trends Most patenting activities take place in FF technologies Rapid increase of REN patents since mid 1990s Number of patents per year 1500 1000 Number of patents 500 0 1980 1985 1990 1995 2000 2005 Year All patents REN patents FF patents 26,000 patents, 82% patents in FF technologies . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 10 / 18

Data Data: Patent trends Most patenting activities take place in FF technologies Rapid increase of REN patents since mid 1990s Patents per country 8,000 6,000 Number of patents 4,000 2,000 0 DE FR CH GB IT SE FI NL AT DK BE LU NO ES IE GR PT REN patents FF patents . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 10 / 18

Data Data: Patent trends Most patenting activities take place in FF technologies Rapid increase of REN patents since mid 1990s Patents per type of REN technology 200 150 Number of patents 100 50 0 1980 1985 1990 1995 2000 2005 Year Wind Solar Geo Marine Hydro Biomass & Waste . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 10 / 18

Data Data: Patent trends Most patenting activities take place in FF technologies Rapid increase of REN patents since mid 1990s Patents per type of FF technology 400 300 Number of patents 200 100 0 1980 1985 1990 1995 2000 2005 Year Coal Engines Turbines Hotgas Steam Burners Furnaces Ignition . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 10 / 18

Data Data: Mixed firms vs. specialized firms Mixed firms (both REN and FF patents) → shift from FF to REN by redirecting their innovation efforts Specialized firms (only REN or FF patents) → shift from FF to REN mainly by entry of new REN innovators Number of firms per type 400 300 Number of firms 200 100 0 1980 1985 1990 1995 2000 2005 Year REN firms FF firms Mixed firms 7,000 firms, 5% mixed, 30% REN firms, 65% FF firms . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 11 / 18

Data Data: Firms Specialized REN firms account for 80% of all REN patents, but innovate only occasionally. Mixed firms are large persistent innovators, mainly in FF technologies (50% of all FF patents) Innovation frequency (years of innovation) Firmtype Mean St. Dev. Min. Med. Max. FF 1.8 2.1 1 1 28 REN 1.2 0.8 1 1 12 Mixed 6.2 5.9 1 4 29 Innovation in mixed firms... FF 5.2 6 1 3 29 REN 1.9 1.8 1 1 14 Mixed firms look for complementarities between REN and FF technologies (e.g. high correlation burners/biomass) . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 12 / 18

Data Data: Factors affecting innovation Fossil fuel prices Prices of oil for electricity generation in USD/toe per country (IEA, Energy Prices Database) Construction of firm-specific prices based on firms’ patent portfolio (weighted by countries in which patents have been filed) Market size Electricity output (in GWh) from renewable and fossil-fuel energy sources (IEA, Energy Statistics database) Construction of firm-specific market sizes based on firms’ patent portfolio (weighted by countries and technologies) Knowledge stocks (path-dependency in innovation) Cumulative number of FF (REN) patents over time at the firm level Knowledge becomes obsolete over time (depreciated by 15% annually). . . . . . . Joëlle Noailly (CPB) Directing Technical Change in Energy Innovation UNIGE, January 24, 2012 13 / 18