The impact of environmental policy stringency and oil prices on innovation: Evidence from the new energy vehicle industry in China

Abstract

New Energy Vehicles (NEVs) have emerged as a critical technological strategy for decarbonizing road transport. This study examines the drivers of innovation in China's NEVs sector, with a particular focus on the induced innovation effects of environmental policy stringency (EPS) and oil prices. Utilizing the Autoregressive Distributed Lag (ARDL) model, we investigate the key drivers of NEVs innovation in China from 1990 to 2020. To further capture the dynamic nature of innovation processes, we employ the novel Dynamic Autoregressive Distributed Lag (DYARDL) simulations model, investigating the response of innovations in the NEVs industry to counterfactual changes in oil prices and EPS. The findings reveal that NEVs innovation in China is significantly influenced by EPS, oil prices, and potential market conditions in the short term. While EPS and potential market conditions continue to be key drivers of NEVs innovation, the induced innovation effect of oil prices in the NEVs industry is eroding in the long term, suggesting China's NEVs sector is becoming increasingly resilient to oil price fluctuations. Furthermore, the DYARDL simulations further validate this pattern, demonstrating that increasing EPS consistently fosters NEVs innovation across both short- and long-term horizons, whereas oil price fluctuations exhibit only transient effects. Our empirical results provide valuable policy insights, emphasizing the importance of maintaining stringent and consistent environmental policies to ensure continuous innovation in the NEVs sector, which is crucial for China's transition towards sustainable transportation.