Six Key Themes for Eco-innovation

Speak of eco-innovation and people immediately think of electric cars and solar power. But the shift to a post-carbon economy depends on much more than technological improvements. It requires a sea change on many levels, from individual lifestyles to commercial investment to international governance.

As of 2012 almost all nations have created policies to stimulate innovation. These are based on two theoretical rationales: a market failure rationale that says that because of the danger of imitation companies will underinvest in innovation, and a system failure rationale that says that the source of underinvestment may lie outside the company (lack of venture capital, barriers to entry).

The latter perspective sees innovation activities as part of a system of knowledge generation, diffusion and use. Here national innovation capacity is shaped by education and training systems, the macroeconomic and regulatory context.

Both perspectives provide general rationales to stimulate innovation but the policies are often mistaken or unnecessary. In many cases they create windfall profits for recipients, providing push when pull is needed and, by being technology-blind (but not neutral), favour incumbents instead of challengers.

We face a double bind. Those who argue for policy coordination usually don’t say much about how this is to be done; while those who favour generic policies turn a blind eye to the need for specific policy to deal with specific barriers (in market entry, regulation, costs).

I wanted to write about this because discussions about eco-innovation are in many cases highly superficial or unnecessarily abstract. This blog is based on a longer article for S.A.P.I.E.NS, where I presented 10 key themes for eco-innovation. Of these I will now focus on six.

Theme 1: Eco-innovation policies should be based on identified barriers
To be effective and not wasteful, innovation policy should be based on identified barriers to particular types of eco-innovation instead of on abstract notions of market failure and system failure. Here are some examples from a 2011 Eurobarometer survey (click to enlarge):

Theme 2: Preventing windfall profits
A drawback of financial support policies is that projects receiving support would also be undertaken in the absence of support. An evaluation in 2002 of the Dutch WBSO fiscal scheme consisting of a subsidy on researcher costs revealed that in 72 per cent of the cases where companies with more than 200 employees use the WBSO, the scheme had no impact on the carrying out of a project. For 4 per cent only it was a deciding factor. For smaller companies the results are more favourable but still not very positive. For all class categories the deciding impact was below 25 per cent.

Theme 3: Specific versus general support
Specific support for R&D has a bad name amongst economists, much more than the generic fiscal support policies, for the reason that ‘government cannot pick winners’. Whilst there is an element of truth in this contention, we have just seen that blind innovation support can be wasteful too. Specific technologies such as algae-based fuels and organic solar cells suffer from specific barriers that no general support scheme can successfully address, which is why we need specific policies. Specific support for specific technologies is not about picking winners but about dealing with specific barriers.

Theme 4: Balance of policy measures and timing
While R&D policy can help facilitate the creation of new environmentally friendly technologies, it provides little incentive to adopt these technologies. Adoption, so important for post-innovation improvements, calls for demand-side measures. Pull policies do not make push policies unnecessary. The need for a balance between supply and demand measures is illustrated by the experiences with the EU emissions trading system (ETS) for carbon emissions. The ETS is the cornerstone of European climate policy, covering 10,800 industrial installations across Europe in four energy-intensive sectors. The total value of carbon trade amounted to 100.5 billion USD in 2008 and 118.5 billion USD in 2009. It was introduced in part because it was believed to stimulate innovation in low-carbon technologies but largely failed to have this effect according to evaluations.

Theme 6: Missions for system innovation
Among innovation experts there is a discussion of whether persistent problems such as global warming warrant mission-oriented programmes. Superficially, the attention to missions seems like a return to the emphasis in the 1950s and 1960s on public goals to guide science and technology development.  There is however a big difference between the old missions about space and military technology and the new mission for environmentally sustainable development: the older projects developed radically new technologies through government procurement projects that were largely isolated from the economy.

Mission-oriented projects for sustainable development require the adoption of new technologies and practices across a wide range of sectors as well as changes in consumer demand and behaviour. This brings many actors into the process and will require a range of policies and customized solutions to deal with the many barriers. Innovation missions require policy coordination across sectors and levels of government. Much of the current attention is on high tech options such as advanced batteries for cars. But CO₂ reductions can also be achieved through policies to reduce car-based mobility, through improved public transport, organized car sharing and intermodal systems of transport with an important role for bicycles. Innovation policy should be more concerned with system changes than it currently is. Instead of being concerned with technologies, policies should be concerned with innovation, especially innovations that require a long period of development and long-term investment, which require the involvement of many actors for their development, creating problems of coordination of interdependent activities and problems of appropriating the benefits.

Theme 8: Innovation portfolio
For sustainable development and green growth it is advisable that government support be given to a broad portfolio of options: to widen the search process, which often is unduly narrow. There should also be a good mix between low-risk and high-risk projects. By relying on adaptive portfolios, two possible mistakes of sustainable energy policy may be prevented: 1) the promotion of short-term options resulting from the use of technology-blind generic support policies such as carbon taxes or cap and trade systems (which despite being ‘technology-blind’ are not technology neutral at all because they favour low-hanging fruit and regime-preserving change, and 2) picking losers (technologies and system configurations which are suboptimal) through technology–specific policies.

Conclusions
The case for eco-innovation policy is particularly strong: first because the benefits are undervalued in the market place, and second because power supply and transport are ‘locked in’ to old technologies.

Markets rarely help eco-innovation because prices do not reflect environmental costs; and this is especially the case for green energy, hampered by the low cost of fossil fuels, long development ‘lead’ times, and grid connection issues. I therefore recommend specific support policies for green innovation beyond existing technological paradigms.

However different types of eco-innovation require different policies. Incremental improvements of commercial products rarely need special support, as firms are normally able to produce and fund these. By contrast radical and system innovations need much more support, especially radical transformative innovations. So I advocate strong support for transformative innovation, embracing not only financial but also institutional change in the economic and social world.

Regarding climate change and energy security, EU policy makers have broadly welcomed the concept of ‘mission’ policies (without specifically using the word mission). There is indeed a need for mission policies but the goal of such policies should not be about developing technologies but much more about ensuring the adoption of innovations. To avoid lock-in, these missions should be based on a portfolio of technologies backed up by adaptive policy making, evolving with experience and critical self-evaluation.

To design and roll out effective policies, government officials need to fully understand eco-innovation barriers and innovation dynamics. Blind technology support, favoured by economists, generates little more than windfall profits and rarely sparks radical change. Meanwhile the case for fiscal policies seems weaker than the case for specific focused innovation policies.

In my opinion, much more support should be given to transformative innovation. The above mentioned themes — which are clearly interlinked — help focus attention on relevant policy issues. Effective policy depends on effective governance, both of which depend on policy learning and building long-term strategic perspectives.

René Kemp, Professorial Fellow, UNU-MERIT and ICIS