Deregulation in an energy market and its impact on R&D for low-carbon energy technology

What is it about?

This paper analyzes the impact of deregulation in an energy market on R&D activities for new energy technology when climate policy is implemented. A model of growth with vertical innovation is modified by including an oligopolistic energy supply sector for demonstrating to what extent deregulation in the energy supply sector will affect R&D activities for low-carbon energy technology, provided that carbon taxation is implemented. The analysis shows that, when the elasticity of substitution between input factors is less than unity, deregulation will drive energy R&D activities and reduce CO2 accumulation if the energy market is highly concentrated in the beginning.

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Why is it important?

On the one hand, deregulation may have an adverse impact on technological development because monopolistic rent is the main source of technological progress. Thus, enhanced market competition negatively affects technological progress. On the other hand, deregulation may have a positive impact on R&D activities. If R&D is an in-house activity and the structure of the product market is imperfect, excessive concentration depresses innovation because large monopoly power induces firms to aim at higher prices rather than at innovation. However, what kind of consequences deregulation would have on R&D activities for new energy technology has not been intensively discussed especially from a theoretial point of view.

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