Do Fossil-Fuel Taxes Promote Innovation in Renewable Electricity Generation?

Abstract

We evaluate the role of a fossil fuel tax and research subsidy in directing innovation from fossil fuel toward renewable energy technologies in the electricity sector. Using a global firm-level electricity patent database from 1978 to 2011, we find that the impact of fossil fuel taxes on renewable energy innovation varies with the type of fossil fuel. Specifically, a tax on coal reduces innovation in both fossil fuel and renewable energy technologies while a tax on natural gas has no statistically significant impact on renewable energy innovation. The reason is that easily dispatchable energy sources like coal-fired power plants need to complement renewable energy technologies in the grid because renewables generate electricity intermittently. Our results suggest that a tax on natural gas, combined with research subsidies for renewable energy, may effectively shift innovation in the electricity sector towards renewable energy. In contrast, coal taxation or a carbon tax that increases coal prices has unintended negative consequences for renewable energy innovation.

From Fossil Fuels to Renewables: The Role of Electricity Storage

“…38 This finding contrasts other recent studies, such as Aghion et al (2016) who find that firms innovate more in clean technologies in the automobile sector when they face higher fuel prices. Our results, however, are in line with Lazkano and Pham (2016) who find evidence for a negative impact of coal prices in the development of renewable technologies in the electricity sector.…”

“…The finding that the coal price is a determinant of innovation in conventional electricity generation is also consistent with the results of previous work (see e.g. Popp, 2002;Aghion et al, 2016;Noailly and Smeets, 2015;Lazkano and Pham, 2016). However, the statistically significant negative impact of the coal price on innovation in renewable technologies suggests that conventional production represents a complement to renewable production.…”

“…Table A.3, in the appendix, presents IPC codes for efficiency-improving fossil-fuel technologies, whereas Table A.4 lists general fossil-fuel based IPC codes. In addition to a broad definition, we analyze the subset of fossil fuel technologies that are used for peak power to complement renewables following the list compiled by Lazkano and Pham (2016). For renewable electricity generation technologies, we compile the list of classification codes directly from WIPO's 10 There are several advantages of a firm-level analysis.…”

“…The classification of conventional technologies is far more challenging. Following Lazkano and Pham (2016), peak-power fossil-fuel technologies include gas turbines, compression-ignition engines and co-generation, and as seen at the bottom of the table, narrowing the definition of conventional technologies to peak-load generation severely reduces the number of observations. Note that it is not straightforward to distinguish between technologies in such way.…”

Analysis on inverter selection for domestic rooftop solar photovoltaic system deployment

“…Hence, the grid dependence on expensive and environmentally unfriendly fossil fuels can be reduced. It should be noted that over 67% of global electricity production is still on fossil fuels . Therefore, the need is to add more renewable energy into the global electricity mix for sustainable and cost‐effective supply.…”