Modelling induced innovation for the low-carbon energy transition: a menu of options

TL;DR: Modelling induced innovation for the low-carbon energy transition requires non-equilibrium, non-optimal models to capture the complex dynamics of the process.

Abstract:  Induced innovation is a multi-faceted process characterized by interaction between demand-pull forces, path-dependent self-reinforcing change, and the cost reduction of technology that occurs with cumulative deployment. By endogenously including induced innovation in energy models, policy analysts and modellers could enable a mission-oriented approach to policymaking that envisions the opportunities of accelerating the low-carbon energy transition while avoiding the risks of inaction. While the Integrated Assessment Models used in the Intergovernmental Panel on Climate Change (IPCC-IAMs) account for induced innovation, their assumptions of general equilibrium and optimality may reveal weaknesses that produce unsatisfactory results for policymakers. In this paper, we develop a menu of options for modelling induced innovation in the energy transition with non-equilibrium, non-optimal models by a three step methodology: a modelling survey questionnaire, a review of the literature, and an analysis of case studies from modelling applications within the Economics of Energy Innovation and System Transition (EEIST) programme. The survey questionnaire allows us to compare 24 models from EEIST partner institutions developed to inform energy and decarbonization policy decisions. We find that only six models, FTT, GIBM, SEC, E3ME, M3E3 and DSK, represent endogenous innovation—in the form of learning curves, R&D, and spillover effects. The review of the literature and analysis of case studies allow us to form a typology of different models of induced innovation alongside the IPCC-IAMs and develop a decision tree to guide policy analysts and modellers in the choice of the most appropriate models to answer specific policy questions. The paper provides evidence for integrating narrow and systemic approaches to modelling-induced innovation in the context of low-carbon energy transition, and promotes cooperation instead of competition between different but complementary approaches. These findings are consistent with the implementation of Risk-Opportunity Analysis as a policy appraisal method to evaluate low-carbon transition pathways.