This paper examines the impact of energy prices on energy-efficient innovations using U.S. patent data from 1970 to 1994. It explores both demand-side and supply-side factors influencing innovation. Demand-side factors, such as energy prices, increase the value of new innovations, while supply-side factors, like scientific knowledge, enable new innovations. Patent citations are used to measure the usefulness of existing scientific knowledge, which helps estimate the productivity of knowledge for inventors. These estimates are combined with demand-side data to model induced innovation in energy technologies. The results show that both energy prices and the supply of knowledge significantly affect innovation. Energy prices have a strong positive impact on energy-saving innovations, and the supply of knowledge also plays a crucial role. The paper discusses the implications of these findings for environmental policy, emphasizing the importance of considering both demand and supply-side factors in technological change. The paper also addresses the limitations of the induced innovation hypothesis, which focuses on factor prices influencing technological change. It highlights the need to consider the development of new knowledge, which is often overlooked. By using patent citation data, the paper provides a measure of technological opportunity, combining information on market demand and technological opportunity in an empirical study of research and development determinants. The paper constructs a dataset of energy patents from 1970 to 1994, identifying 22 technology groups. It uses patent citations to estimate the productivity of existing knowledge, which is then used to analyze the effects of energy prices and the supply of knowledge on innovation. The results indicate that energy prices and the supply of knowledge have significant positive effects on innovation. The paper also finds that there are diminishing returns to research over time, which is supported by the analysis of patent citation data. The paper concludes that energy prices have a strong positive impact on energy-saving innovations, and that the supply of knowledge also plays a crucial role. The findings suggest that environmental policies should consider both demand and supply-side factors in technological change. The paper also highlights the importance of encouraging R&D to develop environmentally-friendly technologies, rather than solely increasing government-sponsored research funding. The results have implications for environmental economists and policymakers, emphasizing the need for mechanisms that encourage R&D to achieve pollution control goals.This paper examines the impact of energy prices on energy-efficient innovations using U.S. patent data from 1970 to 1994. It explores both demand-side and supply-side factors influencing innovation. Demand-side factors, such as energy prices, increase the value of new innovations, while supply-side factors, like scientific knowledge, enable new innovations. Patent citations are used to measure the usefulness of existing scientific knowledge, which helps estimate the productivity of knowledge for inventors. These estimates are combined with demand-side data to model induced innovation in energy technologies. The results show that both energy prices and the supply of knowledge significantly affect innovation. Energy prices have a strong positive impact on energy-saving innovations, and the supply of knowledge also plays a crucial role. The paper discusses the implications of these findings for environmental policy, emphasizing the importance of considering both demand and supply-side factors in technological change. The paper also addresses the limitations of the induced innovation hypothesis, which focuses on factor prices influencing technological change. It highlights the need to consider the development of new knowledge, which is often overlooked. By using patent citation data, the paper provides a measure of technological opportunity, combining information on market demand and technological opportunity in an empirical study of research and development determinants. The paper constructs a dataset of energy patents from 1970 to 1994, identifying 22 technology groups. It uses patent citations to estimate the productivity of existing knowledge, which is then used to analyze the effects of energy prices and the supply of knowledge on innovation. The results indicate that energy prices and the supply of knowledge have significant positive effects on innovation. The paper also finds that there are diminishing returns to research over time, which is supported by the analysis of patent citation data. The paper concludes that energy prices have a strong positive impact on energy-saving innovations, and that the supply of knowledge also plays a crucial role. The findings suggest that environmental policies should consider both demand and supply-side factors in technological change. The paper also highlights the importance of encouraging R&D to develop environmentally-friendly technologies, rather than solely increasing government-sponsored research funding. The results have implications for environmental economists and policymakers, emphasizing the need for mechanisms that encourage R&D to achieve pollution control goals.