Presentation from OECD Expert Workshop on Environmental Policies: Social and Economic Outcomes 23-24 June 2022

1. Three (Often Ignored) Policy Considerations
for Directing Green Innovation
Jacquelyn Pless, MIT Sloan School of Management
OECD Panel Discussion
June 23, 2022

2. Three policy considerations that are
frequently ignored
1. Policy interactions
2. Human capital policy
3. Limitations of divestment

3. Three policy considerations that are
frequently ignored
1. Policy interactions
2. Human capital policy
3. Limitations of divestment

4. Evidence from R&D grants and tax credits

5. Evidence from R&D grants and tax credits
• Small firms: increasing R&D tax
credits enhances effect of direct
grant funding on R&D spending
• Why? Financing constraints
• Larger firms: increasing R&D tax
credits dampens effect of direct
grant funding on R&D spending

6. Carbon tax and (tech-neutral) R&D subsidy interactions

7. Carbon tax and (tech-neutral) R&D subsidy interactions
• Tech neutral R&D subsidies could either enhance or dampen effects of
carbon taxes on innovation
• Why? Because carbon taxes have indirect effect via innovation spillovers
• One way in which tech-neutral R&D tax credits might enhance positive carbon tax
effects is if a positive interaction outweighs any potential negative rivalry effects
• Could dampen if it’s the opposite

8. Three policy considerations that are
frequently ignored
1. Policy interactions
2. Human capital policy
3. Limitations of divestment

10. • Innovating requires human capital (i.e., researchers/inventors)
• Supply of researchers/inventors typically assumed to be inelastic
• Surprisingly little research so far on how to produce and steer
potential inventors (i.e., PhD students in training)

11. Three policy considerations that are
frequently ignored
1. Policy interactions
2. Human capital policy
3. Limitations of divestment

12. ESG indicators often used to inform divestment
decision-making, but what’s in the black box?

13. Main mechanisms for divestment to impact innovation:
1. Cost of capital
2. Demand / changing consumer preferences

14. But effects on CoC likely won’t be enough
• Theory suggests only a tiny effect
• Empirically find no effect yet on cost
of capital when firms are included in
leading socially conscious US index
• Find that impact investors would need
to make up to >80% of all investable
wealth to incr CoC by more than 1%

15. Continuing to invest in “dirty” provides a seat
at the table
• Influence firm’s direction
• But need to know what
management practices and
strategies are important for
successfully innovating
• This is maybe where ESG
indicators can be helpful (but
only if they’re unpacked!)
Created by author using data from the Transition Pathways Initiative.

16. Three policy considerations that are
frequently ignored
1. Policy interactions
2. Human capital policy
3. Limitations of divestment
Thank you!
Contact: jpless@mit.edu