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Journal article
Carbon taxes, path dependency, and directed technical change: Evidence from the auto industry

February 2016
Paper No' :

Tags: automobile industry; innovation; panel data; pollution tax; spillover effect

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, hybrid, and hydrogen) patents across 80 countries over several decades. We show that firms tend to innovate more in clean (and less in dirty) technologies when they face higher tax-inclusive fuel prices. Furthermore, there is path dependence in the type of innovation (clean/dirty) both from aggregate spillovers and from the firm’s own innovation history. We simulate the increases in carbon taxes needed to allow clean technologies to overtake dirty technologies. © 2016 by The University of Chicago. All rights reserved.