Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry

Abstract

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.

Environmental Policy and Induced Technological Change: Evidence from Automobile Fuel Economy Regulations

“…Simply put, my estimation strategy is a difference-in-differences framework in which I compare the Japanese automakers with selected American and European automakers before and after the Japanese fuel economy regulations started to affect the former (but not the latter). Overall, this is similar to the strategy used by Popp (2006) and Aghion et al (2016). These papers note international differences in environmental regulations or fuel prices and the heterogeneity across manufacturers (of air pollution control equipment for Popp (2006) and of vehicles for Aghion et al (2016)) in the relative importance of different geographic markets in their sales.…”

“…Overall, this is similar to the strategy used by Popp (2006) and Aghion et al (2016). These papers note international differences in environmental regulations or fuel prices and the heterogeneity across manufacturers (of air pollution control equipment for Popp (2006) and of vehicles for Aghion et al (2016)) in the relative importance of different geographic markets in their sales. Under these circumstances, firms face different levels of regulatory pressure and the papers exploit this variation to identify induced innovation.…”

“…The empirical strategy of the paper is to exploit the international differences in fuel economy regulations and the variation across automakers in the relative importance of different national markets in their sales, as in Popp (2006) and Aghion et al (2016). Japan tightened its fuel economy regulations in the 1990s, preceding other regions such as the US and the EU.…”

“…Based on US patent data on energy-efficient automotive technology, Crabb and Johnson (2010) measure technological progress induced by high oil prices and the CAFE standards, finding robust empirical evidence for the impact of oil prices, but none for the CAFE standards. By analyzing firm-level patent data from multiple countries, Aghion et al (2016) observe that "clean" innovations in the auto industry (for example, innovations associated with electric, hybrid, and hydrogen vehicles) are stimulated by high fuel prices.…”

“…4, such as the possibility that an induced shift of a Japanese automaker's PPF might not fully transfer to the production process of its US-market fleet. This empirical strategy is similar to the one taken by Popp (2006) and Aghion et al (2016) in the sense that induced innovation is identified by exploiting international differences in environmental regulations or fuel prices and the variation across firms in the relative importance of different national markets in their sales.…”