This study shows that renewable energy policies have an important side effect of inducing technological risk that makes firms' already-adopted technologies become uncompetitive more quickly. This induced risk irrevocably reduces firms' incentives to develop and adopt new technologies, thus undermining policy effectiveness to promote technological change. We find that the quantity-based renewable energy standard is more effective than the R&D or price subsidy to maintain firms' innovation and investment incentives under the induced-risk effect. This effectiveness advantage further influences policy choices between the price-based and quantity-based policy instruments, and provides a bias in favor of a quantity instrument in Weitzman's criterion.

Original languageEnglish (US)
Article number102665
JournalJournal of Environmental Economics and Management
StatePublished - Jul 2022


  • Induced technological risk
  • Prices vs. quantities
  • Real options
  • Renewable energy investment

ASJC Scopus subject areas

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law


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