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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

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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 instruments on the rate and direction of technological change associated with

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To compare the findings of studies on the innovation effects of environmental policy instruments based on different methodologies:

1. Theoretical models of incentives

2. Econometric studies

3. Case studies

4. Surveys

Aims: Show how findings are influenced by methodological choices

(approach and constraints) Propose a research agenda to guide future empirical research

Focus and aim of the paper

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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

1. Theoretical models of incentives

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2. Econometric studies

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

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

Authors Focus Type of policy and innovation

Main Findings

Ashford et al. (1985)

Ten regulatory cases in the US after 1970

Regulatory stringency; product and process innovation

Standard mechanisms encouraged a variety of innovations, both incremental and radical. Innovative behaviour sensible to stringency

Christiansen (2001)

Innovation effects of the Norwegian carbon tax system in the oil industry

Tax (economic instrument), technological and institutional innovations

Diffusion of available technologies and incremental process changes were the main innovation pattern observed

Taylor et al. (2005)

Innovation in SO2 control technologies

3 types of policy (regulation, support to research, ET)

Regulation stimulated different types of innovation, emission trading had a limited impact on innovation but saved costs

Mickwitz et al. (2005)

Role of policy instruments in the diffusion of innovations in two sectors

Regulation, taxation and R&D funding

Common claims are frequently contracticted. It is not possible to generalize about the role of policy instruments without considering context factors

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Authors Focus Type of policy and innovation

Main Findings

Nill and Tiessen (2005)

Innovation consequences of CAA in the automotive sector

Standard regulation, product innovation

Policy influences the competition between technological alternatives: timing and stringency affects variation-selection dynamics

Türpitz (2004)

The drivers for environmentally-friendly product innovations

Product innovation Regulation appears to be the main driver of product-related eco-innovations

Simila (2002)

Impact of Water Act on process innovation in the Finnish Pulp&Paper industry

Water permits, process innovation

Political and Implementation issues affect compliance and innovation choices

Yarime (2005)

Policies and technologies to control mercury emissions

Regulation, clean technology versus end-of-pipe

Regulation initially forced the adoption of a suboptimal solution

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4. Surveys

Authors Focus Type of policy and innovation

Main Findings

Becker and Engelmann (2005)

Factors promoting and hindering the adoption of innovations in the German chemical industry

End-of.pipe and clean technology

Environmental regulations are by far the most important factor in stimulating innovation, followed by reputation gains and reduction of material costs. The attainment of the regulation requirements proved to be the most important impediment for further EOP

Mazzanti and Zoboli (2006)

Eco-innovation drivers in industries in a local productive district

Different types of policies and innovations

Found evidence of networking for eco-innovation and established a positive relationship between organisational innovation and technological innovation. It shows that eco-innovation is not just about pollution control or reduction.

Frondel et al. (2004)

Influence of various policy instruments on the choice of end-of-pipe and integrated process changes in Germany

Different types of policies and innovations

Stringency is the most significant determinant of the eco-innovation process. Regulation is important especially for end-of-pipe solutions; no significant impacts of market-based instruments

Del Rio Gonzaléz (2005)

Factors influencing clean technology adoption in the Spanish Pulp and Paper industry

Environmental regulations, different kinds of innovation

The most important drivers for the adoption of environmental technologies are: corporate image, regulatory pressure, personal commitment of managers, pressure from foreign parent companies and pressure from environmental NGOs-

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Authors Focus Type of policy and innovation

Main Findings

OECD (2007)

Role of environmental policy initiatives on environmental innovation

Different types of policies and innovations

Direct regulations (technology standards) increase the propensity to invest in EOP, while taxes and (to a lesser extent) performance standards and input bans favour the introduction of change in production process. Policy stringency is a key issue.

Rehfeld, Rennings and Ziegler (2007),

Determinants of environmental product innovations in German manufacturing sectors

Environmental regulations, product innovations

Compliance with existing and future legal requirements is an important innovation goal for 68,9% of environmental product innovators, but the econometric analysis found less relevant impact

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Methodological constraints influence findingsTheorethical 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 innovation output 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

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Methodological constraints influence findings

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1. Technology responses to environmental regulations depend on more than the incentives, both inside and outside the company (techno-economic context);

2. 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;

3. Almost all firms are engaged in environmental innovation, most of them consist however of simple improvement or the adoption of technologies developed by others;

4. 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;

Issues of understanding: a guide for future empirical research

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Issues of understanding: a guide for future empirical research (continued)

5. Impacts of policy instruments depend on how the instrument is formulated and used, relevant aspects are stringency, timing and combination with other instruments;

6. There is not one single best instrument to foster innovative response to environmental regulations;

7. 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;

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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”)

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