Private Sector Innovation in Biofuels in the United States: Induced by Prices or Policies?

Abstract

It has been shown in recent years that high energy prices induce investments in energy research. $100/barrel oil, strategic concerns, concerns about global warming, and pork-barrel politics have also rekindled the enthusiasm of the public and government for policies that encourage research and innovation on biofuels. This article is a first attempt to develop an econometric model to measure how innovations as measured by ethanol-related patents have responded to high oil prices and to government policies. We look at both the demand-side factors, such as federal policies subsidizing ethanol production or mandates for the use of biofuels, and supply-side factors, such as government funding for biofuels research. We find that both oil prices and federal research grants have significant positive effects on innovation. However, the size of the ethanol market has a negative effect, as do federal tax credits, with mandates being insignificant.