The Unintended Sailing Ship Effect: Why Environmental Policy Stringency Might Sustain Internal Combustion Engine Technology in the Age of Electric Vehicles

Abstract

This paper investigates an unexpected paradox in the automotive industry, where stringent environmental policies, alongside demand-pull and technology-push forces, may inadvertently reinforce the lock-in of internal combustion engine (ICE) technology, thereby impeding the transition to electric vehicles (EVs) and a new technological paradigm. Drawing on the concept of sailing ship effect, we analyze how certain levels of environmental policy stringency (EPS) can spur "greenish" innovations in ICE systems while discouraging the radical, transformative "green" innovations essential for a full-scale shift to EVs.Using a country-level panel dataset (2005–2021) , we examine whether EPS, technological specialization, and consumer demand have driven a paradigm shift—marked by a decline in ICE-related innovations and a rise in EV-related technologies—or whether they have instead fueled incremental ICE advancements without substantially accelerating EV breakthroughs. Our findings reveal a non-linear relationship between EPS and innovation outcomes, where moderate regulatory pressure stimulates incremental "greenish" innovations in ICE systems, while only high stringency, combined with favorable market and technological conditions, fosters radical "green" innovations essential for a full-scale transition to EVs. Additionally, we highlight the role of demand-pull factors (e.g., consumer preferences and market size) and technology-push factors (e.g., R\&D investments and specialization) in determining whether EVs can overcome ICE dominance. These results underscore the need for a balanced and well-calibrated regulatory strategy that, together with supportive market and technology policies, fosters both near-term emission reductions and long-term technological transformation toward a sustainable, low-carbon automotive future.

Keywords: environmental policy stringency, electric vehicles, internal combustion engines, automotive industry, green patents, green technologies