Innovation and Climate Change: A Framework for Effective Environmental Policy

Climate change and environmental degradation may be the greatest existential threats the world will face for generations to come. After entering in to office in January 2017, the Trump administration signaled that it would pull out of the Paris Climate Agreement, dealing a blow to the spirit of global cooperation on climate change. The administration has also indicated that it will decrease R&D funding for “green” research, in addition to reevaluating or eliminating many environmental policies and regulations. These changes beg the question: What should the new U.S. environmental/climate policy agenda be outside of the Paris Climate Accord?

A recent paper published by Italian researchers, Costantini, Crespia, and Palmad, looked at the effect of public policy on the adoption of technologies that increase energy efficiency in residential buildings, and offered generalizable guidelines for how governments can develop effective environmental policies across industries. The authors compare data on policies enacted in Organization for Economic Co-operation and Development (OECD) countries aimed at increasing energy efficiency in residential buildings and patent applications in those countries for “eco-innovations” over the period 1990-2010. “Eco-innovation” is an all-encompassing term defined as any innovation in a product, service or process whose adoption or creation results in a reduction of environmental harm. Residential energy efficiency policies were chosen as a proxy for environmental policies, as improving energy efficiency is crucial in the “transition toward a low-carbon economy.” Additionally, eco-innovations are used as measures of climate progress, with technological advancement perceived as the groundwork for all carbon-reduction activities.

There are a number of factors that influence energy efficiency. In particular, the authors have examined two main policy categories: demand-pull policies and technology-push policies. Demand-pull policies increase demand in the market for eco-innovations such as subsidies for home solar systems, and technology-push policies increase scientific knowledge and the number of new technologies in the market.

The researchers used empirical econometric models to determine that both of these policy categories drive innovation in the energy efficiency sector. Furthermore, these policies are more effective when used in balance, as this can lead to the development of new technologies and products. The researchers also discovered one caveat related to implementing multiple energy efficiency policies at once: Only a limited number of policies can be implemented at a single time to avoid the likelihood of conflicting mechanisms in the market. This means the goals and designs of policies in the energy efficiency portfolio should be strategic.

According to the authors, the innovation activity of foreign nations is another factor that impacts domestic eco-innovation. The study reveals that if a foreign trading partner implements either of the two categories of policy, regardless of the country’s domestic policy, there will be spillover effects into the domestic market. Ultimately, governments are better-off when their energy efficiency policies are similar to the policies of other governments, as the spillover effect can create synergies and efficiencies that accelerate energy efficiency adoption in both countries. However, the researchers are cautious about this conclusion due to a lack of research in this area.

While the researchers do not mention exactly which policies are best in driving eco-innovation, they do provide a useful framework for U.S. policy makers going forward as they reconstruct environmental and climate policy. Policymakers should aim to stimulate demand and supply in eco-innovation markets. Meanwhile, they should look to the rest of the world as a model for how to build their policy portfolio, as similar policies across different countries positively amplify the effect of eco-innovation.

Article source: Costantini, Valeria, Francesco Crespi, and Alessandro Palma. “Characterizing the policy mix and its impact on eco-innovation: A patent analysis of energy-efficient technologies,” Research Policy. 46:4 (2017): 799-819.

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