Energy prices, competition, and environment-related innovation

As directed technical change has the potential to delink economic activity from environmental degradation, understanding the drivers of environment-related innovation is crucial. This paper combines the literature on induced innovation and the literature on the relation between competition and innovation. Using patent data I empirically estimate the role energy input prices play in environment-related patenting under different intensities of market competition. Using Poisson, Negative Binomial, and zero-inflated Poisson count models I find that both electricity prices and natural gas prices positively affect environment-related patenting, where the positive effect of electricity prices strengthens with market competition and where the positive effect of gas prices weakens with market competition. I additionally find no strong evidence for an inverted-U relationship between competition and innovation, as suggested in the literature. The relationship is rather linear where its slope depends on energy prices. Only for relatively high energy prices an inverted-U relationship may occur.