Allocating subsidies to R&D or to market applications of renewable energy? Balance and geographical relevance

This paper discusses a basic problem in innovation studies, namely the allocation of scarce funds for governmental subsidies to market and R&D support, with the aim to effectively promote a transition from fossil fuels to renewable energy technologies. Although various ideas on this exist, a general framework is lacking. We develop such a framework, discuss its relevance for various types of countries and examine which policies different countries have employed to promote renewable energy. We compare the strategies of Germany, with more focus on market instruments, of California, with a greater emphasis of R&D, and of China, characterized by central planning. In addition, we interpret the results of decomposition analyses using two factor learning curves. We draw conclusions about a desirable balance of subsidies and associated policies.