Technological Change and the Environment

Chapter 5

The Induced Innovation Hypothesisand Energy-Saving TechnologicalChange

Richard G. Newell, Adam B. Jaffe, and Robert N. Stavins

5.1   Introduction

There is currently much interest in the potential for public policies to reduce energy consumption because of concerns about global climate change linked with the combustion of fossil fuels. Basic economic theory suggests that if the price of energy relative to other goods rises, the energy intensity of the economy will fall as a result of a series of behavioral changes: people will turn down their thermostats and drive more slowly; they will replace their furnaces and cars with more efficient models available on the market; and, over the long run, the pace and direction of technological ...