Editing IPCC:AR6/WGIII/Chapter-16 (section)

==== 16.2.3.1 Determinants of Technological Change Direction: Prices, Market Size and Government ====

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Firms change their choice of technology upon change in prices: when one input (e.g., energy) becomes relatively expensive, firms pick technologies that allow them to economise on that input, according to price-induced technological change theory ( [[#Reder--1965|Reder and Hicks 1965]] ; [[#Samuelson--1965|Samuelson 1965]] ; [[#Sue%20Wing--2006|Sue Wing 2006]] ). For example, an increase in oil price will lead to a choice of fuel-saving technologies. Such a response of technological change was evident during the oil-price shocks in the 1970s ( [[#Hassler--2012|Hassler et al. 2012]] ). Technological change that is induced by an increase in price of a resource can never lead to an increase in use of that resource. In other words, rebound effects associated with induced technological change can never offset the saving effect of that technological change ( [[#Antosiewicz--2021|Antosiewicz and Witajewski-Baltvilks 2021]] ).

The impact of energy prices on the size of low-carbon technological change is supported by large number of empirical studies ( [[#Popp--2019|Popp 2019]] ; [[#Grubb--2020|Grubb and Wieners 2020]] ). Studies document that higher energy prices are associated with a higher number of low-carbon energy or energy efficiency patents ( [[#Newell--1999|Newell et al. 1999]] ; [[#Popp--2002|Popp 2002]] ; [[#Verdolini--2011|Verdolini and Galeotti 2011]] ; [[#Noailly--2015|Noailly and Smeets 2015]] ; [[#Ley--2016|Ley et al. 2016]] ; [[#Witajewski-Baltvilks--2017|Witajewski-Baltvilks et al. 2017]] ; [[#Lin--2019|Lin and Chen 2019]] ). [[#Sue%20Wing--2008|Sue Wing (2008)]] finds that innovation induced by energy prices had a minor impact on the decline in US energy intensity in the last decades of the 20th century, and that autonomous technological change played a more important role. Several studies explore the impact of a carbon tax on green innovation ( [[#16.4|Section 16.4]] ). However, disentangling the effect of policy tools is complex because the presence of some policies could distort the functioning of other policies ( [[#Böhringer--2010|Böhringer and Rosendahl 2010]] ; [[#Fischer--2017|Fischer et al. 2017]] ) and because the impact of policies could be lagged in time ( [[#Antosiewicz--2021|Antosiewicz and Witajewski-Baltvilks 2021]] ).

The direction of technological change depends also on the market size for dirty technologies relative to the size of other markets ( [[#Acemoglu--2014|Acemoglu et al. 2014]] ). Due to this dependence, climate and trade policy choices in a single region can alter the direction of technological change at the global level ( [[#16.2.3.3|Section 16.2.3.3]] ).

The value of the market for clean technologies is determined not only by current profit, but also by a firm’s expectation of future profits ( [[#Alkemade--2012|Alkemade and Suurs 2012]] ; [[#Greaker--2018|Greaker et al. 2018]] ; [[#Aghion--2019|Aghion 2019]] ). One implication is that bolstering the credibility and durability of policies related to low-carbon technology is crucial to accelerating technological change and inducing the private sector investment required ( [[#Helm--2003|Helm et al. 2003]] ), especially in the rapidly growing economies of Asia and Africa which are on the brink of making major decisions about the type of infrastructure they build as they grow, develop, and industrialise ( [[#Nemet--2017|Nemet et al. 2017]] ).

If governments commit to climate policies, firms expect that the future size of markets for clean technologies will be large and they are eager to redirect research effort towards development of these technologies today. The commitment would also incentivise acquiring skills that could further reduce the costs of those technologies ( [[#Aghion--2019|Aghion 2019]] ). However, historical evidence shows that policies related to energy and climate over the long term have tended to change ( [[#Taylor--2012|Taylor 2012]] ; [[#Nemet--2013|Nemet et al. 2013]] ; [[#Koch--2016|Koch et al. 2016]] ). Still, where enhancing policy durability has proven infeasible, multiple uncorrelated potentially overlapping policies can provide sufficient incentives ( [[#Nemet--2010|Nemet 2010]] ).

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