Environmental Policy Uncertainty And Innovation In Environmental Technologies

The effect of uncertainty related to environmental damages or technological change has on the optimal level of environmental policy stringency has been extensively analysed in the literature. However, empirical evidence on the innovation efforts of firms in the face of actual policy uncertainty has not been examined formally. Drawing upon real options theory, it is hypothesised that for any given level of environmental policy stringency, environmental policy uncertainty can serve as a brake on investment in innovative activities which can reduce the cost of meeting environmental objectives. By increasing the benefits of 'waiting', policy uncertainty will reduce incentives to identify innovative environmental technologies. Using patent counts as a measure of environmental innovation, preliminary empirical evidence has been presented which supports this hypothesis.

The issues of technology and uncertainty are very much at the heart of the policy debate of how much to control greenhouse gas emissions. The costs of doing so are present and high while the benefits are very much in the future and, most importantly, they are highly uncertain. Whilst there is broad consensus on the key elements of climate change science and agreement that near-term actions are needed to prevent dangerous anthropogenic interference with the climate system, there is little agreement on the costs and benefits of climate policy. The book looks at different ways of reconciling the needs for sustainability and equity with the costs of action now. Presenting a compendium of methodologies for evaluating the economic impact of technological innovation upon climate-change policy, this book describes mathematical models and their predictions. The goal is to provide a practitioner’s guide for doing the science of economics and climate change. Because the assumptions motivating different problems in the economics of climate change have different complexities, a number of models are presented with varying levels of difficulty: reduced-form and structural, partial- and general-equilibrium, closed-form and computational. A unifying theme of these models is the incorporation of a number of price and quantity instruments and an analysis of their respective efficacies. This book presents models that contain structural uncertainty, i.e., uncertainty that economic agents respond to via their risk attitudes. The novelty of this book is to relate the effects of risk and risk attitudes to environment-improving technological innovation.

Exploiting econometric techniques aimed at dealing with the dynamics of economic systems and the heterogeneity of agents performances, the volume integrates innovation-based reasoning with ex-post analyses, and presents ex-ante analyses able to evaluate the role of climate change policies by using computable general equilibrium models such as the Global Trade Analysis Project for Energy (GTAP-E). The authors merge and use a range of datasets, including OECD-PATSTAT and STAN, to test novel techniques informed by evolutionary economic theories and the Porter hypothesis. The immediate relevance and applicability of the models will strengthen the hand of policy analysts for whom the dynamic efficiency of environmental policy is a new, high-profile evaluation criterion.

This work assesses the impact of environmental policy on technical change in the development of clean technologies. It focuses in particular on the possibility of inducing radical change in technology policy, in contrast to the current regulatory practices which lead to the modification of existing products.

This paper studies the effect of climate change mitigating policies on innovation in clean energy technologies. Results suggest that the tightening of environmental policies since the early 1990s have made a statistically and economically significant contribution to the increase in clean innovation. These effects generally materialized quickly, within 2 to 3 years of the policy change, and were driven by individually significant marginal effects of both market-based policies – such as feed-in tariffs and trading schemes – as well as non-market policies, such as R&D subsidies or emission limits. Looking at electricity innovation in particular, the paper finds that the estimated effect on total innovation is positive on net, meaning that increased innovation in clean and grey technologies is not offset by a decrease in innovation in dirty technologies. From a policy point of view, the paper’s results call for strong policy efforts to decisively shift innovation towards clean technologies.

This paper aims to summarize the state of academic knowledge surrounding the economics of environmental innovation. Following a definition of environmental technology, the paper enumerates and describes the obstacles or constraints to the development of eco-innovation. Key Findings: • Many of the challenges to innovation in general are mirrored and exaggerated in eco-innovation. • Environmental innovation is fraught with uncertainty: uncertainty about the end-product of a research process, uncertainty about the reception by the market, uncertainty about the ability to appropriate the returns to research while competitors try to produce similar results, and uncertainty about regulatory impacts on the research process and end-result. In addition, there is frequently uncertainty surrounding the pricing of competing as well as complementary goods. • On the other hand, uncertainty itself often stimulates innovation. Policymakers may very well be conflicted about how much structure to provide for innovators, if they truly thrive on some degree of uncertainty. This is further complicated by the fact that the appropriate policy response undoubtedly differs by industry, by technological problem, and even by time period. • This review of economic studies reveals five themes which affect the development of eco-innovations: intellectual property rights (e.g. patents), economies of scale, markets and incentives, system complexity and policy choices. • While developing nations frequently claim that strong intellectual property rights on carbon abatement technologies hinder developing countries' greenhouse gas abatement efforts, it has been shown that IPRs do not constitute as significant a barrier as claimed since a variety of technologies exist for reducing emissions. In many cases, IPR-protected technologies are not necessarily more costly than those not covered. • Numerous studies have documented the reasons to encourage strong patent law. There is near universal agreement among economists that strong intellectual property rights are an essential prerequisite to the development of environmental technologies. Moreover, most firms indicate that IPRs are essential to the profitability of commercial research, so in its absence they simply will not commit research and development (R&D) funding to the market in question. At the same time, the value of patents, and other forms of protection, varies across industries and across innovations. • One of the challenges of sequential innovation lies in the difficulty in rewarding early innovators for the technological foundations they develop, while also allowing for the reward of subsequent innovators who improve and extend the original technology to new applications. This is particularly applicable in the context of new technologies, such as environmental technologies. • The challenge of achieving efficient scale and reducing per-unit production costs is critical to the success of most innovative products and processes. Since most innovations are subject to economies of scale (or increasing returns to scale), in which higher levels of output are associated with lower per-unit costs, larger firms may be better positioned to develop environmental technologies. • The greater the ease of development and extent to which the innovator will profit from the innovation and appropriate the benefits will both facilitate environmental innovation. However, in the case of eco-innovation, there is uncertainty about actual costs, consumer values, and policy platforms now and in the future. Moreover, the market is complicated by competing technologies (e.g.: fossil fuels) subject to negative externalities in which the user does not bear the full cost of the good. Further, the public goods nature of environmental technology prevents the user (and the innovator) from fully capturing the benefits of the innovation. • The role of federal regulations is critical to the development of eco-innovation. Environmental regulation might lead to cost-saving innovation if a) the fixed costs of innovation are lower than compliance plus production, or b) spillover effects make innovation strategically a bad idea for the firm but a good idea for society, or c) regulation helps to fix incentive problems between managers and owners, or d) regulation helps to clear information flow. • Given that knowledge has positive spillovers, benefits to those who bore none of the cost of acquisition, economists conclude that the amount of R&D provided by private markets will be lower than the socially optimal level. As such, questions emerge as to whether the returns to R&D are sufficient to encourage eco-innovation. • There is an important role for policy in the support or stifling of eco-innovation. Five themes emerge from the papers reviewed. First, there is a clear portfolio of policy alternatives to stimulate innovation or energy-related investment including taxes, subsidies, permits and standards/regulations. Second, there is strong evidence that regulatory policies can be very effective. Third, policy may serve to create a market for previously uncertain or ill-defined environmental commodities. Fourth, current policymakers are frequently unable to muster the political will to enact legislation that is pro-environmental innovation. Fifth, heterogeneity may be a desirable attribute in policy since many environmental issues are local or regional in nature, and thus require local knowledge and solutions. • Across numerous studies there are five themes which resonate with all economists as challenges to eco-innovation: intellectual property rights, economies of scale, markets and incentives, complex systems, and policy. The greatest potential for propelling innovation is usually found in market forces and incentives. Uncertainty, externalities, and subsidies to competing goods undoubtedly hinder the process, but the motivation provided by potential profit is undeniable. However, due to the spillovers associated with eco-innovation and the public goods nature of these technologies, there is a role for government intervention in order to spur an increase in environmental innovation. In this context it is essential for policymakers to find a balance: encouraging competition while guaranteeing a large market for minimum economic scale, reducing uncertainty about future resource prices while keeping alternatives open, offering rights of exclusion to intellectual property holders while not curtailing the ability of sequential innovators to build upon past successes, promoting social goals while respecting market pressures.

This paper investigates the effect of Climate Change Policies (CCPs) on green innovation, for a sample of 40 advanced and emerging market economies and 5 economic sectors, during the period 2000-2021. Our results suggest that CCPs increase green patents, with the effect increasing gradually over time. The effect is larger for non-market-based policies—such as R&D subsidies—and technology-support instruments, in countries with greater competitiveness and during periods of stronger economic activity—that is, higher GDP growth, lower uncertainty and financial stress. The results based on a difference-in-differences approach suggest that the positive effect of stricter CCPs on green innovation is stronger in sectors with limited financial constraints.

How can policy-makers pursue environmental goals while simultaneously keeping the burdens on industry to a minimum? Why does innovation play the key role in this balancing act, and what are the implications for the development of sustainable industrial societies? This book examines the evolution of environmental policy in 6 OECD countries. Through numerous examples, it contrasts the widely-varying political and regulatory styles and their consequences for innovation. Two industry-specific case studies provide a transnational perspective on the co-evolution of technology and environmental policy. The book concludes that innovation can be successfully harnessed by setting credible, long-term environmental goals and ensuring that regulatory instruments are grounded in flexibility, dialogue and trust.

This book presents provides a rigorous yet accessible treatment of the main topics in climate change policy using a large body of research generated using WITCH (World Induced Technical Change Hybrid), an innovative and path-breaking integrated assessm