Many readers may be unfamiliar with the way economists typically view the process of technological change, thus it is useful to first establish this common understanding. Furthermore, to understand the potential for public policy to affect energy efficiency, it is also necessary to understand the process through which technology evolves: invention, innovation, energy diffusion, and product use.
Invention involves the development of a new idea, process, or piece of equipment. This activity typically takes place inside the laboratory. The second step is the process of technology innovation, in which new processes or products are brought to market. Another way of describing this stage is commercialization. The third step is diffusion, the gradual adoption of new processes or products by firms and individuals, which then also decide how intensively to use new products or processes.
Tying this all together, it would be possible, for example, to think of a fundamentally new kind of automobile engine being invented. This might be an alternative to the internal combustion engine, such as a system dependent on energy-efficient fuel cells. The innovation step would be the work carried out by automobile manufacturers or others to commercialize this new engine––that is, bring it to market, then offer it for sale. The diffusion process, then, would reflect the purchase by firms and individuals of automobiles with this new engine. Finally, the degree of use of these new automobiles will be of great significance to demand for particular types of energy.
The reason it is important to distinguish carefully among these different conceptual steps—invention, innovation, diffusion, and use—is that public policies can be designed to affect various stages and will have specific and differential effects in energy efficiency technology.
