The optimal time path of clean energy R&D policy when patents have finite lifetime

Abstract

We study the optimal time path for clean energy innovation policy. In a model with emission reduction through clean energy deployment, and with R&D increasing the overall productivity of clean energy, we describe optimal R&D policies jointly with emission pricing policies. We find that while emission prices can be set at the Pigouvian level independently of innovation policy, the optimal level of R&D subsidies and patent lifetime change with the stages of the climate problem. In the early stages of clean energy development, innovators find it more difficult to capture the social value of their innovations. Thus, for a given finite patent lifetime, optimal clean energy R&D subsidies are initially high, but then fall over time. Alternatively, if research subsidies are kept constant, the optimal patent lifetime should initially be long and fall over time.