Zeyna Hasnner
Zeina Hasna
Economist, International Monetary Fund
Green innovation is a key element in the fight against climate change. It includes the provision of new low-carbon technologies (LCTs) and the reduction of the cost of existing technologies, both of which are critical to the transition to a green economy. While significant progress has been made over the past few decades, the momentum for green innovation has slowed in recent years. In 2010, the share of green innovation in total patent applications peaked at around 10 percent, and has declined modestly since then.
In our latest paper, we show that green innovation not only contributes to the environment, but also increases economic activity in the short to medium term, thereby reducing the cost of climate policy compliance. The prospect of such positive effects is particularly attractive at a time when medium-term growth prospects are bleak, political and economic constraints are in place, and society is increasingly concerned about adopting a stronger climate agenda. At the same time, we emphasize the role of climate policy, international cooperation and multilateralism in driving green innovation and its diffusion in the global economy.
Green innovation generates economic benefits
Green innovation can help avoid natural disasters and reduce damage to the climate, and is expected to yield long-term economic dividends. However, the short-term effects of green innovation are not obvious when most investment costs and production processes are more suitable for non-green innovations.
Our analysis shows that doubling annual green patent filings after five years could boost gross domestic product (GDP) by 1.7% compared to the baseline scenario. This is lower than our most conservative estimates, with other estimates showing a rise in gross domestic product (GDP) to 6.8%. In addition, the estimated increase in economic activity for green innovation is similar to that of non-green innovation.
Although the economic benefits are comparable, green and non-green innovations affect the economy in different ways. Green innovation affects economic growth by boosting investment, but does not increase productivity in the short term, whereas non-green innovation has a more direct impact on productivity. This is perhaps not surprising, as the purpose of green technologies is not necessarily to increase productivity, but to decarbonize. Similarly, the need to restructure production processes around new green technologies can also explain why the initial impact on productivity was weak, or even negative. However, over time, some green innovations are expected to increase productivity because it makes energy cheaper and improves energy efficiency. In addition, we found that green innovation is associated with more overall innovation, not just the substitution of green technologies for other technologies. This may be because green technologies often require complementary innovation. Therefore, the impact of green innovation on overall innovation may also lead to more economic growth.
In addition to domestic policies, international cooperation is also key to stimulating green innovation and its diffusion
We also look at the role of policy in driving green innovation and communication. Domestic climate policy is, of course, central to green innovation, with particularly strong evidence on regulations, emissions trading systems that bind emissions, and spending measures such as feed-in tariffs and R&D subsidies, a conclusion consistent with the model of Acemoglu and others. However, our research also highlights that global climate policies, as measured by the distance-weighted sum of policies in other countries around the world, have a greater impact on domestic green patent filings than domestic policies. Moreover, international climate agreements, such as the Kyoto Protocol and the Paris Agreement, have nearly doubled the impact of domestic policies.
There are three plausible explanations for the impact of global climate policy on green innovation. First, given the global nature of the market, companies have to react to both domestic and large policies, because that's where technology can be sold. This effect is reinforced in a larger addressable market. In the automotive market, for example, the development and sale of electric vehicles has risen sharply with the recent announcement by the government of a future ban on the sale of internal combustion engine vehicles. Second, as more countries become involved in the development of these new technologies, technology spillovers can be harnessed more forcefully, building on the progress made by other countries. Third, global policy milestones have strengthened the credibility of these policies and strengthened their impact on innovation by making governments more certain in their commitment to the green transition.
The cross-border deployment of technologies, especially to emerging market and developing economies (EMDEs), is critical to the success of global emissions reduction efforts. In emerging market and developing economies, production processes are typically much more emissions-intensive, even within the same narrow sector. This, combined with more dynamic growth than advanced economies, means that if nothing is done, emerging market and developing economies will be the main source of future emissions growth.
Implementing climate policies in emerging market and developing economies can reap the rewards in terms of technology diffusion by increasing imports of "low-carbon technologies", especially inflows of green FDI. A large increase in climate policy (equivalent to one standard deviation of the distribution of changes in the number of climate policies) would increase green FDI inflows by 7%. FDI inflows are particularly important because, in addition to the transfer of technology, FDI can relax financing constraints and, in some cases, regulatory constraints, which can seriously impede the diffusion of technology in emerging market and developing economies. Reducing tariffs on low-carbon technologies is another policy that can significantly boost imports of low-carbon technologies and green FDI inflows, illustrating the importance of reducing the cost of technology, which is key to the green transition, remains relatively high in low- and middle-income countries.
At the same time, our analysis suggests that there may be a tension between the goal of developing green technologies domestically and the goal of promoting them internationally. Unilateral green subsidies in advanced economies, as part of green industrial policies, have led to a shift in green investment to these countries, while green investment in other recipient economies, especially emerging market and developing economies, has fallen sharply. Each standard deviation increase in subsidies reduces green FDI outflows by more than 10 per cent. While such subsidies may be important for domestic economic development and may have global benefits in the long run, making green technologies cheaper, they can have important negative spillover effects on other economies that cannot afford such subsidies. They also pose the risk of escalating trade tensions. A fragmented world with smaller potential markets could stifle the drive for green innovation and slow the transfer of "low-carbon technology" products to emerging market and developing economies. It is therefore important for advanced economies to carefully consider the potential negative spillovers of subsidies, especially for emerging market and developing economies with less fiscal space, and to ensure that their policies are consistent with international rules, including the avoidance of local content requirements.
Original link:
https://cepr.org/voxeu/columns/green-innovation-and-deployment-fuelling-economies-reducing-emissions
(Chang Changsheng/excerpt)
The above views and remarks do not represent the position of this platform.
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