Shock Therapy for a Greener Future: The Dynamics of Firms’ R&D Investments, joint with Katinka Holtsmark and Karen Helene Ulltveit-Moe

Abstract: The transition from fossil fuels to clean energy requires a large-scale shift in technological development from fossil to clean technologies. We analyze how green research and development in firms that supply inputs to producers of dirty energy (oil), react to a strong negative shock to future expected returns to oil producers. In a theoretical framework of directed technical change, we show that if firms face a cost of adjusting the size of their innovation activity, a negative shock to profitability in dirty energy production may induce exposed firms to shift their activity towards green innovation. In the empirical analysis, we study firms supplying intermediates to oil producing companies and propose a novel method of identifying the extent of their exposure to variations in the oil price. We find that firms that are more exposed to the 2014 fall in oil prices increase their clean research and development more than firms that are less exposed to the shock. Our findings have important implications for how to design effective policies that promote environmentally sustainable economic growth.