Path-dependent energy innovation under carbon pricing and subsidy policies: challenges for Europe’s net-zero transition

Abstract This study empirically investigates how energy costs, environmental policy, and history of innovation (path dependency) influence energy innovation in Europe over the period 2000-2020. Using panel data for 17 European countries we analyze clean and dirty energy patenting behavior in relation to energy prices, energy taxes, carbon pricing mechanisms, and energy R&D subsidies. We estimate Poisson count data models, with robustness assessed using negative binomial specifications. The results indicate that higher energy prices are robustly associated with increased clean energy innovation, whereas energy costs do not suggest a significant effect on fossil-based innovation. Instead, dirty innovation is largely explained by accumulated fossil knowledge stocks, pointing to strong path dependence and persistent carbon lock-in. Moreover, the adoption of EU ETS is associated with higher patenting activity in both clean and fossil technologies, consistent with engaging in defensive innovation by extending existing fossil-based technological capabilities. Overall, the findings suggest that carbon pricing, while necessary, has historically been insufficient to weaken fossil innovation trajectories when path dependence is strong, leaving the energy transition constrained by carbon lock-in. Effective climate policy, therefore, requires a complementary mix in which EU-wide price signals are combined with tightly targeted public R&D subsidies for breakthrough zero-carbon technologies and deployment policies that accelerate learning and scale-up in clean niches.