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

==== 16.4.4.5 Assessment of the Impact on Innovation, Competitiveness and Distributional Outcomes of Regulatory Policy Instruments Targeting Efficiency Improvements ====

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There is medium evidence that the introduction of flexible, performance-based environmental regulation on energy efficiency in general (e.g., efficiency standards) can stimulate innovative responses in firms ( [[#Ambec--2013|Ambec et al. 2013]] ; [[#Popp--2019|Popp 2019]] ) ( ''medium evidence'' , ''high agreement'' ). Evidence comes from both observational studies that examine patenting, R&amp;D or technological responses to regulatory interventions, and from surveys and qualitative case studies in which firms report regulatory compliance as a driving force for the introduction of environmentally-beneficial innovations ( [[#Grubb--2021|Grubb et al. 2021]] ). While the literature examining the impact of environmental regulation on innovation is large, there have been fewer studies on the innovation effects of minimum energy or emissions performance regulations specifically relating to climate mitigation. We discuss in turn two types of efficiency regulations: on vehicles, and on appliances.

The announcement, introduction and tightening of vehicle fleet efficiency or greenhouse gas (GHG) emission standards either at the national or sub-national level positively impacts innovation as measured by patents ( [[#Barbieri--2015|Barbieri 2015]] ) or vehicle characteristics ( [[#Knittel--2011|Knittel 2011]] ; [[#Kiso--2019|Kiso 2019]] ) as summarised in a review by [[#Grubb--2021|Grubb et al. (2021)]] . Detailed studies on the innovation effects of national pollutant (rather than energy) regulations on automotive innovation also indicate that introducing or tightening performance standards has driven technological change ( [[#Lee--2010|Lee et al. 2010]] ). Some studies in the USA that examine periods in which little regulatory change took place have found that the effects of performance standards on fuel economy have been small ( [[#Knittel--2011|Knittel 2011]] ) or not significant relative to the innovation effects of prices ( [[#Crabb--2010|Crabb and Johnson 2010]] ). This is at least in part because ongoing efficiency improvements during this period were offset by increases in other product attributes. For example, a study by [[#Knittel--2011|Knittel (2011)]] observed that size and power increased without a corresponding increase in fuel consumption. It has also been observed that regulatory design may introduce distortions that affect automotive innovation choices: in particular, fuel economy standards based on weight classes have been observed to distort light-weighting strategies for fuel efficiency in both China ( [[#Hao--2016|Hao et al. 2016]] ) and Japan ( [[#Ito--2018|Ito and Sallee 2018]] ).

A number of studies have focused on the impacts of a sub-national technology-forcing policy: the California Zero Emission Vehicle (ZEV) mandate. When it was introduced in 1990, this policy required automotive firms to ensure that 2% of the vehicles they sold in 1998 would be zero-emission. In the years immediately after introduction of the policy, automotive firms reported that it was a significant stimulus to their R&amp;D activity in electric vehicles ( [[#Brown--1995|Brown et al. 1995]] ). Quantitative evidence examining patents and prototypes has indicated that the stringency of the policy was a significant factor in stimulating innovation, though this was, in part, dependent on firm strategy ( [[#Sierzchula--2015|Sierzchula and Nemet 2015]] ). As for the previous instruments, most of the evidence comes from industrialised countries, and additional research on other countries would be beneficial.

Regulation-driven deployment of existing technologies can generate innovation in those technologies through learning by- doing, induced R&amp;D and other mechanisms, although not in all cases ( ''medium evidence'' , ''medium agreement'' ) ( [[#Grubb--2021|Grubb et al. 2021]] ). The introduction or tightening of minimum energy performance standards for appliances (and for buildings, in [[#Noailly--2012|Noailly (2012)]] ) have driven innovation responses, using direct measures of product attributes ( [[#Newell--1999|Newell et al. 1999]] ) and patents ( [[#Noailly--2012|Noailly 2012]] ; [[#Kim--2019|Kim and Brown 2019]] ), though not all studies have found a significant relationship ( [[#Girod--2017|Girod et al. 2017]] ). There is also evidence of a correlation between regulation-driven deployment of energy-efficient products with accelerated learning in those technologies ( [[#Van%20Buskirk--2014|Van Buskirk et al. 2014]] ; [[#Wei--2017|Wei et al. 2017]] ).

In addition to observational studies, evidence on the relationship between innovation and regulation comes from surveys in which respondents are asked whether they have engaged in innovation leading to energy saving or reduced GHG emissions, and what the motivations were for such innovation. Survey evidence has found that expected or current regulation can drive both R&amp;D investment and decisions to adopt or introduce innovations that reduce energy consumption or CO 2 emissions ( [[#Horbach--2012|Horbach et al. 2012]] ; [[#Grubb--2021|Grubb et al. 2021]] ). Survey-based studies, however, tend not to specify the type of regulation.

Minimum energy performance standards and appliance standards have been known to result in negative distributional impacts ( ''limited evidence'' , ''medium/high agreement'' ). Several studies focused on the USA have highlighted that minimum energy performance standards for vehicles tend to be regressive, with poorer households disproportionately affected ( [[#Jacobsen--2013|Jacobsen 2013]] ; [[#Levinson--2019|Levinson 2019]] ), particularly when second-hand vehicles are taken into account ( [[#Davis--2019|Davis and Knittel 2019]] ). Similar arguments, though with less evidence, have been made for appliance standards ( [[#Sutherland--2006|Sutherland 2006]] ).

Overall, the extent to which regulations in energy efficiency result in positive or negative competitiveness impacts in firms is mixed ( ''limited evidence'' , ''high disagreement'' ). A meta-analysis of 107 studies, of which 13 focused on regulations relating to energy consumption or GHG emissions, found that around half showed that regulations resulted in competitiveness impacts, while half did not ( [[#Cohen--2018|Cohen and Tubb 2018]] ). [[#Cohen--2018|Cohen and Tubb (2018)]] also found that studies examining performance-based regulations were less likely to find positive competitiveness impacts than those that examined market-based instruments.

While most of the literature addresses the extent to which regulation can induce innovation, a number of case studies highlight that innovation can also influence regulation, as the costs of imposing regulation are reduced and political interests emerge that seek to exploit competitive advantages conferred by successfully developing energy-efficient or low-carbon technologies ( ''medium evidence'' , ''high agreement'' ). Case studies map the causal mechanisms relating regulations and innovation responses in specific firms or industries ( [[#Gann--1998|Gann et al. 1998]] ; [[#Kemp--2005|Kemp 2005]] ; [[#Ruby--2015|Ruby 2015]] ; [[#Wesseling--2015|Wesseling et al. 2015]] ).

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