Fig. 1. Induced innovation and energy prices. Source: Popp (2002).

Fig. 2. Welfare gains over time in the ENTICE model. Source: Popp (2004). The figure shows the cumulative gains in welfare from an optimal carbon tax. Note that welfare in the induced innovation is initially lower than exogenous R&D, but that induced innovation leads to larger long-run improvements than in a simulation with exogenous technological change.

Fig. 3. Theoretical framework. This figure presents a schematic of a theoretical framework for linking knowledge flows to diffusion. The figure considers the decision of a firm to adopt a new environmental technology. In the diagram, boxes represent endogenous variables chosen by firms and circles represent exogenous variables. Solid lines represent linkages well-established in the literature. Broken lines are links that are less established.

Induced innovation and the elasticity of energy consumption

Source: Popp (2001).

The table shows the short-run breakdown in the effects on energy consumption from a change in energy prices. The elasticity of energy use with respect to induced innovation is the percent change in energy consumption resulting from the new technologies induced by a 1% change in energy prices. The elasticity of energy use with respect to price is the change in energy consumption resulting from factor substitution. Column three shows the total effect of a change in energy prices. It is the sum of the elasticities in columns 1 and 2. Column 4 presents the percentage of the total elasticity that is due to induced innovation. Finally, column 5 gives the elasticity of energy with respect to price from a regression that excludes the knowledge stocks, so that only a time trend is used to capture technological change. Note that these elasticities are comparable to the combined elasticities presented in column 3.