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

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 and hybrid) patents across 80 countries over several decades. We show that firms tend to innovate relatively morein clean technologies when they face higher tax-inclusive fuel prices. Furthermore,there is path dependence in the type of innovation both from aggregate spillovers andfrom the firm�s own innovation history. Using our model we simulate the increasesin carbon taxes needed to allow clean to overtake dirty technologies