Energy Prices and Induced Technological Progress
Technological progress plays a crucial ameliorating role in reducing energy consumption for combating climate change. Energy economists often cite market-based instruments such as energy taxes for encouraging energy-saving technological progress. Energy policy interventions may change the constraints and incentives that affect technological change (TC). For instance, changes in current relative energy prices may induce substitution of energy by other factors of production, and changes in its long-run prices may induce development of new energy-saving technologies. The importance of relative prices as a stimulator of technological advancement is traceable to Hicks (1932). The theory of induced innovation helps in measuring the impact of relative prices on the direction of technological change (Hayami and Ruttan, 1971).