Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 16/2016: Do Fossil fuel Taxes Promote Innovation in Renewable Electricity Generation?

Itziar Lazkano () and Linh Pham ()
Additional contact information
Itziar Lazkano: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Linh Pham: University of Wisconsin-Milwaukee, Postal: Department of Economics, University of Wisconsin-Milwaukee, P.O.Box 413, Milwaukee, WI 53201, USA

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.

Keywords: Electricity; Energy taxes; Renewable; coal; natural gas technologies

JEL-codes: L90; O30; Q40

74 pages, November 16, 2016

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