Creating innovation through environmental policy : evidence from OECD engine patents: TSU Working paper no. 1064

An invention, when applied for the first time, is called an innovation. Resembling a tree that sustains branches, this paper identifies the factors which sustain complementary innovations of vehicle engines during 1974-2010 in the OECD region. A data set of 26,378 patents is used to estimate the impact on innovation of past energy prices, of legal limits on engine fuel efficiency, of non CO2 standards, of consumer demand and cost of capital. The innovation models emphasise state actions that create innovations by technology push: public R & D expenditure and non CO2 emissions limits. The models capture market pull sources of engine innovation. The first model confirms that observed innovation (diesel engine design) varies positively with state intervention via CO2 standards and public R & D funds. Both a) the introduction of the EU Voluntary Agreement and b) lower capital costs magnify the growth of innovation. In the second model, observed innovations (pollution control) respond to OECD pollution standards and to diesel prices. (The impact of NOx emission standards on pollution control innovations differs between Japan and the US). Corporate size, high energy prices and market power favour innovation within Japanese firms