The transition to clean energy will require a significant reallocation of technological investments away from fossil energy sources towards cleaner alternatives. This column investigates whether leveraging the technological capabilities in the fossil energy supply chain can help incentivise this reallocation with the required speed. Using data from Norway, the authors highlight an underexplored channel for renewable technologies – lower profitability in the fossil energy sector led to reallocation of R&D resources within firms, triggering a shift towards clean innovation.
Clean innovation is key to combatting climate change. After a period of rapid increase in developments of clean technology, these investments have slowed globally over the last decade (Cervantes et al. 2023, Hasna et al. 2024). In a recent study (Bøler et al. 2024), we highlight an underexplored channel for clean innovation. We show that lower profitability in the fossil energy sector can lead to reallocation of R&D resources within firms in the supply chain and trigger a shift towards clean innovation.
An extensive literature has investigated how clean R&D responds to changes in energy prices, focusing on how incentives for clean innovation are affected by changes in demand for renewable energy and clean technologies (see Popp 2002, Aghion et al. 2016, Acemoglu et al. 2023). What has received less attention is the question of whether reduced fossil energy prices can induce increased investments in clean R&D in the fossil energy supply chain by lowering profitability. Moreover, there is little empirical evidence on the role of within-firm reallocation in shifting from fossil to clean technologies.
The 2014 oil price crash: A shock to the system
In mid-2014, global oil prices plummeted by nearly 60% in a matter of months. Figure 1 shows the development of the price of brent crude oil over the period we study. The dotted line shows the future price of oil in Q2 2014, just before the price drop started. Oil prices were expected to remain high. The dashed line shows the future price of oil as estimated in Q4 of 2014, illustrating that after most of the shock had materialised, markets anticipated that prices would remain low for the foreseeable future.
Figure 1 Crude oil price and oil future prices
Note: Figure plots crude oil prices until the end of 2014 and oil future prices from 2014 to 2017. Source: Norwegian Central Bank Monetary Policy Reports, 2/2014 and 4/2014.
For Norway, where oil exports are a cornerstone of the economy, the shock was profound. Firms supplying goods and services to the oil extraction industry saw sharp declines in future sales and profit expectations. Conventional wisdom suggests that these firms would respond by scaling back innovation efforts; instead, many firms pivoted towards clean R&D. Figure 2 shows a sharp increase in the share of firms with clean R&D following the fall in the oil price. Another striking finding is that most of the increase in clean R&D came from firms with ongoing investments in non-clean R&D.
Figure 2 Share of firms with clean R&D
Note: Figure shows the share of firms reporting investments in clean R&D relative to all firms engaged in R&D. Sample covers the years 2007 to 2017.
A firm-level look at innovation dynamics
Our hypothesis is that the oil price shock triggered a reallocation of R&D resources in firms that supply the oil extraction industry. To investigate this further, we draw on detailed firm-level data on trade and innovation. To estimate the causal effect of the oil price shock on firms’ clean R&D investments, we rely on firm-level trade data to compute a measure of firm exposure to the oil price shock. This novel, firm-level exposure measure allows us to compare firms in the same industry that have similar characteristics but are differentially exposed to the shock due to their product mix.
Our study demonstrates that the firms most exposed to the oil price drop were significantly more likely to initiate clean R&D projects and increase their share of clean R&D spending. Importantly, this shift did not stem from an overall increase in innovation budgets. Instead, firms strategically reallocated their existing R&D resources towards clean technologies.
Our conjecture is that a key driver behind the observed reallocation of resources is adjustment costs associated with the rescaling of R&D activities. We think of these adjustment costs as capturing not only direct hiring or firing costs, but also other costs associated with economic and behavioural responses that might arise in a team of highly specialised workers. We show in a theoretical model how the presence of such adjustment costs give rise to within-firm reallocation of R&D investments among exposed firms.
Our empirical results support this prediction and suggest that the existence of adjustment costs encouraged firms to repurpose their existing R&D teams for clean technology projects rather than dismantling them altogether. Our results underscore the importance of understanding within-firm adjustment dynamics in response to economic shocks. Negative shocks to the fossil energy sector don’t just reduce dirty innovation – they can also drive a meaningful increase in clean technology development.
For policymakers, our research offers an additional rationale for carbon pricing. Beyond raising the cost of carbon emissions, such policies may also trigger responses that accelerate the transition to clean energy technologies through lowering profitability in the fossil energy supply chain. Shocks to the fossil energy sector, whether induced by market forces or deliberate policy interventions, can act as powerful catalysts for clean innovation.
Source : VOXeu
