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Innovation policy for directing technical change in the power sector

  • Rob Aalbers

    ()

  • Victoria Shestalova

    ()

  • Viktoria Kocsis

    ()

This paper discusses policy instruments for redirecting technical change within the electricity sector to mitigate climate change. First, we unravel the mechanism behind directed technical change, explaining why markets may underprovide innovations in expensive renewable technologies in comparison to innovations in energy-efficient fossil-fuel generators. Subsequently, we characterize technical change in electricity generation technologies, stressing the heterogeneity of knowledge spillovers both within and between clean electricity generation technologies. We argue that there exists a rationale for a portfolio approach to innovation in the electricity sector, i.e., optimal innovation policies are neither fully generic nor fully specific; and they need to be adapted, in response to new information learned by the government. The existing innovation literature does not, however, provide a clear-cut answer for designing such a policy. We compare policy instruments and argue that public R&D support to clean technologies, either in the form of subsidies or prizes, seems to be the prime candidate for implementing non-generic innovation policy.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 223.

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Date of creation: Oct 2012
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Handle: RePEc:cpb:discus:223
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