Induced Innovation and Energy Prices

This paper uses U.S. patent data from 1970 to 1994 to study the impact of energy prices on energy-efficient innovations. Theories of technological change have focused both on demand-side factors, which spur innovative activity by increasing the value of new innovations, and supply-side factors, such as scientific advancements that make new innovations possible. Data on demand-side factors are easily obtained, but data on supply-side factors that influence innovation are not readily available. This paper uses patent citations as a measure of the usefulness of the existing base of scientific knowledge. Citations to previous patents are used to construct productivity estimates, which measure the usefulness of the existing stock of knowledge to inventors in a given energy field for any given year. These estimates are then combined with data on demand-side factors to estimate a model of induced innovation in energy technologies. The results indicate that both energy prices and the supply of knowledge have strongly significant positive effects on innovation. The paper concludes with a discussion of the implication of this work for environmental policy. The author would like to thank William Nordhaus, Joel Waldfogel, Robert Evenson, Ariel Pakes,