International expansion of renewable energy capacities: The role of innovation and choice of policy instruments

Which renewable energy (RE) policy instrument is most effective in expanding the international diffusion of RE and what is the role of innovation? We consider rich policy and patent data for 189 countries and territories to investigate these diversely debated questions for wind and solar photovoltaic capacities. This allows us, firstly, to contribute to the limited evidence on the effect of RE innovation on RE diffusion and its interrelated influence with RE support policies. Secondly, we can evaluate the disentangled individual policies' effectiveness in a broad instrument-country context. Thirdly, we control for the inherent endogeneity of policy instruments and innovation. We find that RE innovation, which appears to be largely policy-induced, is among the most promising ways to increase RE capacities. The most effective policy instruments tend to be quotas with certificate trading, tendering, and fiscal instruments that provide specific investment support, i.e. investment tax credits and capital subsidies. Less tangible and projectable measures, such as the most commonly implemented sales-related tax reductions and RE targets, are least effective. While interactions between instruments influence the composition of a well-designed policy mix, there are also differences in the policies' effectiveness and role of innovation depending on the countries' level of development. •We study the role of RE policies and innovation for wind and solar PV capacity growth•Quotas with certificate trading and tendering are among the most effective instruments•Fiscal support of the initial investment is effective but not support of RE sales•Most effective individual instruments can be both complements and substitutes•Innovation, which is largely policy-induced, is important to increase RE capacities