Electricity industry (de)regulation and innovation in negative-emission technologies: How do market liberalization influences climate change mitigation?

Abstract

Deregulation is widely considered a driver of competition and reduction of market inefficiency and can lead to innovation. We deepen the literature and policy understanding of this narrative by extending it to negative emission technologies while we strengthen the findings of previous studies by accounting for input research and development (R&D) expenditure with heterogeneity analyses. The authors adopt the staggered difference-in-difference (SDID) design to 25 OECD countries for the period 1985–2015 to examine the influence of deregulation on innovation in the electricity industry with an emphasis on negative emission technologies. The empirical results show that while electricity deregulation is generally associated with increased innovation, only intense market deregulation can promote innovation in carbon capture and storage (CCS). This benefit is more observed in European Union OECD countries and those with high output innovation performance. The results also show that when implemented after market deregulation, solar PV and Wind power Feed-in tariffs effectively promote renewable energy innovation. The results suggest that electricity deregulation is a compelling market tool to promote climate change mitigation since the competitive market it creates supports the advancement of CCS and renewable energy innovation. We recommend a deregulation process to accommodate an effective market model designed to incentivize the promotion of funding for negative emission technologies.