Do Higher Electricity Prices Induce Innovation? An Empirical Analysis

Abstract

Green innovation is an important part of combating climate change, and therefore, it is important to examine what stimulates innovation, especially in innovation-forward countries, such as Sweden. Sweden’s electricity pricing system is also interesting to study. This thesis has examined the effect of electricity prices on both total R&D expenditure and the probability that firms invest in energy or CO2-reducing innovation in Sweden. To study the probability of if a firm invests in energy- or CO2-reducing innovation, a logit random-effects is used. To study the effect of electricity prices on total R&D expenditure, a fractional fixed effects logit model is used. The results indicate that, in the short run, electricity prices have no significant effect on whether firms invest in energy- or CO2-reducing innovation in Sweden. However, the results are not robust. Furthermore, the previous year’s electricity price is found to affect on a firm’s total R&D expenditure in the next year in Sweden. The effects of electricity price on R&D expenditure are found to have some heterogeneous effects and are sensitive to which electricity price measurement is used to study the relationship. While the relationship between electricity prices and innovation in Sweden would benefit from further studies, this thesis provides knowledge on the effect of electricity prices on induced innovation in Sweden, which has not previously been studied, as previous research has examined electricity prices and innovation in China and Germany. 1 1Acknowledgments: First, I want to thank the Swedish Agency for Growth Analysis for the opportunity to write my thesis in collaboration with them. I also want to thank David Birksjö, Magnus Gustavsson and Patrik Tingvall at the Swedish Agency for Growth Analysis for all their help with the thesis. Furthermore, I want to thank my supervisor Åsa Löfgren for the guidance during the thesis writing process. I also want to thank my opponents for their valuable feedback. Lastly, I want to thank my friends and family for their encouragement.