The innovation effects of environmental policy instruments – a typical case of the blind men and the elephant

1. The innovation effects of environmental policy instruments– a typical case of the blind men and the elephant René Kemp, Serena Pontoglio DIME Workshop on Empirical Analyses of Environmental Innovations. Fraunhofer Institute for Systems and Innovation Research (ISI), Karlsruhe, January, 17th-18th, 2008

2. Environmental policy: a driver of the eco-innovation process • Environmental policy is one of many factors driving the eco-innovation process (demand-pull factor). This is something • recognized by the economic theory and • empirically investigated • Much attention has been dedicated to studing the effects of different environmental policy instrumentson the rate and direction of technological change associated with

3. Focus and aim of the paper To compare the findings of studies on the innovation effects of environmental policy instruments based on different methodologies: • Theoretical models of incentives • Econometric studies • Case studies • Surveys Aims: • Show how findings are influenced by methodological choices (approach and constraints) • Propose a research agenda to guide future empirical research

4. 1. Theoretical models of incentives • Focus: assess and rank firm incentives for innovation (dymanic efficiency effects) in pollution control under different regulatory regimes; • Incentives: measured as cost savings in firms abatement costs (direct costs, transfer losses or transfer gains). Cost savings are indicative for the probability that innovation in pollution control will occur; • Innovation: modelled as a downward shift in the marginal cost curve of emission reductions • Findings: Economic theory recognize the superiority of market-based instruments with respect to command-and-control instruments. • Original analysis form Milliman and Prince (1989) and Downing and White (1986) find that emission taxes and auctioned permits are better facilitators of technological change than regulation. • Requate and Unold (2003) and Requate (2005) in a recent review (28 models) conclude that no unequivocal ranking is possible; however price mechanisms seem to perform better

5. 2. Econometricstudies Reviews from: • Jaffe et al. (2002) • “market-based instruments (MBIs) for environmental protection are likely to have significantly greater, positive impacts over time than command-and-control (CAC) approaches” • Vollebergh (2007) for OECD • 26 studies reviewed, focus on different effects on the rate and direction of technological change associated with different environmental policy instrument • Main conclusion: changes in invention, innovation and diffusion of technologies are clearly observable, but is difficult to compare the impacts of different instruments, because of different methods. The distinction between CAC and MBIs is too general and requires further investigation

6. 3. Case studies • Contributons are dispersed, we reviewed about 40 ex post evaluations on the effects of policies on eco-innovation. Some examples:

8. 4. Surveys

10. Theorethical models of incentives: limited to incentives for innovation in pollution control and end-of pipe solutions (no other forms of eco-innovation) factors related to techno-economic context and policy-design issues are not considered Econometric analysis: very difficult to incorporate policy design aspects of policies the majority consider only innovations in pollution control (no other forms of eco-innovations) the majority use inventive activity indicators (patents and environmental R&D) and not innovationoutput measures Case studies: Not possible to determine causal links in a rigorous way Findings difficult to compare Findings are highly case-specific Surveys: Sensitive to respondees’ knowledge Sample bias may be an issue Methodological constraints influence findings

11. Methodological constraints influence findings

12. Issues of understanding: a guide for future empirical research • Technology responses to environmental regulations depend on more than the incentives,both inside and outside the company (techno-economic context); • We should not talk about innovation and environmental innovation in an unqualified way, incremental/radical, end of pipe/process integrated innovations have different environmental and economic effects and drivers; • Almost all firms are engaged in environmental innovation, most of them consist however of simple improvement or the adoption of technologies developed by others; • Technology responses are not a simple response to regulatory pressure, the link between regulator and regulated is not unidirectional, the development of an innovation may precede a policy and even exert influence over the policymaking process;

13. Issues of understanding: a guide for future empirical research (continued) • Impacts of policy instruments depend on how the instrument is formulated and used, relevant aspects are stringency, timing and combination with other instruments; • There is not one single best instrument to foster innovative response to environmental regulations; • Environmental policy can have both a positive and a negative influence on environmental innovation, the negative can be the favoring of an environmental inferior technological path, when a policy influence the competition of alternative technologies;

14. Conclusions • Policy instruments cannot be usefully ranked with regard to their effects on eco-innovation • The effects of environmental policy instruments in the real world are governed by the complexity of the innovation processes and political considerations of using instruments • There is more evidence of regulations stimulating radical innovation than of market-based instruments doing so. • Regulation can also act as a barrier to innovation • More attention should be given to the analytical soundness of models and to the results of different literatures (“let’s not be blindfolded”)