Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 6: Energy Price-induced Technological Change
INTRODUCTION Technological advancements play a crucial ameliorating role in managing the longstanding problems of climate change and energy security through reducing energy consumption. Economists often cite the use of energy (or carbon) taxation to reduce the emission of greenhouse gases. However, in most environmental policy models, technological change is incorporated as an exogenous variable. Several empirical studies analyze the relationship between energy prices and energy-saving induced innovation.1 This study extends the literature by explicitly incorporating environmental variables, such as carbon dioxide (CO2) and sulfur dioxide (SO2), and attempts to find how the changes in oil prices are related to induced innovations that are not only energy saving, but also emissions reducing. That is, the question to be addressed is whether increases in oil prices lead to a reduction in energy consumption and emissions. Changes in production factors are expected to change the constraints and incentives that affect technological change (TECH). The importance of relative prices as a stimulator of TECH is traceable to Hicks (1932) who argues: ‘a change in relative prices of factors of production is itself a spur to invention, and to invention of a particular kind – directed to economizing the use of a factor which has become relatively expensive’ (pp. 124–5). In general, the theory of induced innovation addresses the effects of relative prices on the direction of TECH (Hayami and Ruttan, 1971). It is expected that the increase in long-term oil prices will moderate the use of oil and replace it with other relatively cheap...
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