Carbon Taxes, Path Dependency, and Directed Technical Change: Evidence from the Auto Industry

TLDR

The study asks whether directed technical change can mitigate climate change. The authors build a firm‑level panel of clean and dirty auto patents across 80 countries and simulate the carbon tax levels required for clean technologies to surpass dirty ones. Higher fuel prices drive firms to innovate more in clean technologies, and innovation paths show dependence on spillovers and past activity.

Abstract

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.