Supporting innovation and early deployment of low-carbon alternatives

This chapter begins by observing that the directions for technology advances in sectors now seen as easy to decarbonize took their lead from a series of oil price shocks and energy security concerns over several decades. It then examines evidence on market imperfections confronting low-carbon alternatives. Some are similar to those for new technologies in general, such as R&D knowledge spillovers. Their more distinguishing features are external scale economies and network effects from deploying them in transforming energy systems. Such positive cost spillovers from early deployment of low-carbon alternatives are a key feature of ongoing transformations. Departing from the orthodoxy of using government supports for R&D and emissions pricing alone to advance low-carbon alternatives, heterodox industrial policies were used to address effectively these and other market imperfections affecting their advance. This outcome is consistent with more general evidence on effectiveness of industrial polices, especially when attuned to market competition.