Perhaps the starkest example of this is in the automotive sector.

Internal combustion
engine (ICE) vehicles remain more profitable than EVs and large ICEs are generally more
profitable than small ones. During the period of phasing in EVs, the revenues of carmakers
might be maintained by maximising sales of sports utility vehicles and other large vehicles
in order to reinvest in EV R&D. At the same, time, R&D for improving ICE technologies that
are losing market share becomes less justifiable. R&D in better diesel engines is already
being scaled back. Consequently, the demands of R&D for EVs and automated vehicles may
lead to higher sales of less efficient vehicles in the medium term, slowing the overall rate of
improvement in ICE fuel economy. A similar pattern may emerge for gas turbines and
boilers, which will remain major components of energy production and investment for
decades to come. This factor will have implications for future emissions trends and the
speed and shape of the transition to clean energy technologies.

Implications of the evolving corporate energy innovation landscape for governments

Changes to the ways that new energy technologies are developed and commercialised by
the private sector can require changes in the ways that they incentivise and track
innovation. For example, companies’ needs to collaborate over short timescales with the
most suitable and innovative partners globally are making companies’ networks of partners
more international in many cases. Having a strong ecosystem of research institutions and
energy entrepreneurs can be more valuable than tax breaks and R&D funding for making a
country attractive to a large company as a place to undertake novel projects. Secondly,
absolute corporate expenditure on R&D may become less closely linked to the pace of
corporate innovation in low-carbon technologies if developing new – often digital –
solutions requires less in-house expenditure that is accounted for as R&D. The need to
rapidly collaborate to test and scale up ideas can reduce companies’ incentives to create
and defend in-house intellectual property. These outcomes can potentially make metrics
such as R&D budgets and patents less reliable for tracking progress, and affect the
effectiveness of tax policies designed to incentivise innovation. Furthermore, while these
broader approaches to corporate innovation can be well suited to certain types of energy
technologies, policy makers may need to ensure that their national or regional policies also
support the improvements to capital-intensive hardware solutions needed to tackle climate
change. In these areas, patient government capital for higher-risk technologies could
become even more vital.
© OECD/IEA, 2018

206 3. Investment in R&D and new technologies