Policy Tools for Clean Innovation

1. Policy Tools for Clean Innovation
David Popp
June 2016

2. Introduction
• While penetration of renewable energy sources is growing,
achieving significant reductions in carbon emissions requires
further development and deployment
• Innovation is needed to:
– Reduce the cost of existing technologies
– Develop new breakthrough technologies
– Develop complementary technologies (e.g. grid management, energy
storage) to better integrate intermittent renewables into transmission
grids
• This talk highlights key lessons from research on policy and
innovation
David Popp

3. Technological Change & the Environment
• Technological change proceeds in three stages:
– Invention: an idea must be born
– Innovation: new ideas are then developed into commercially viable
products
• Often, these two stages of technological change are lumped together
under the rubric of research and development (R&D)
– Diffusion: to have an effect on the economy, individuals must choose
to make use of the innovation
David Popp

4. Technological Change & the Environment
• At all three stages, market forces provide insufficient
incentives for the development and diffusion of
environmentally‐friendly technologies
– Environmental Externalities
• Pollution created in the production or use of a product are not normally
included in the price of the product
• Thus, neither firms nor consumers have incentive to reduce pollution
on their own
• This limits the market for technologies that reduce emissions, which in
turn reduces the incentives to develop such technologies
• Note that there may be some private benefits (e.g. lower fuel costs,
increased demand from green consumers), so demand is not
necessarily zero
• Addressed by environmental policy
David Popp

5. Technological Change & the Environment
• At all three stages, market forces provide insufficient
incentives for the development and diffusion of
environmentally‐friendly technologies
– Environmental Externalities
– Knowledge as a Public Good
• New technologies must be made available to the public for the inventor to
profit
• When this happens, some or all of the knowledge that makes up the
invention also becomes available to the public.
• Public knowledge may lead to knowledge spillovers—additional
innovations, or even to copies of the current innovations, that provide
benefits to the public as a whole, but not to the innovator
• Addressed by science and technology policy
• May be general (IP) or specific (subsidies for renewable R&D)
David Popp

6. The Role of Policy
• Both environmental policy and R&D policy are needed
– Environmental policy creates a demand for clean technologies
– This demand creates incentives for climate‐friendly innovation
• R&D policy can help lower the costs of climate policies
– While R&D policy plays a role, it is not a substitute for environmental
policy
– R&D policy can help with the development of technologies, but not with
the diffusion of technologies
David Popp

7. 1) Environmental Policy Creates Incentives for Innovation
• Innovation responds quickly to incentives
– Newell et al. (1999) & Popp (2002) both find most of the response of R&D
to higher energy prices occurs within 5 years
– Responses to policy are even faster
David Popp

8. U.S. NOX Post‐Comb. Treatment Patents
0
10
20
30
40
50
60
70
80
1967 1972 1977 1982 1987 1992 1997
p rio rity year
number
U S F oreign Japan G erm any
Source: Popp (2006)
David Popp

9. David Popp
Source: Dechezleprêtre et al. (2009)
Innovation and Climate Policy
0
.005
.01
.015
.02Shareofclimate-relatedinventions
1978 1983 1988 1993 1998 2003
Year
USA & Australia Other Annex 1 countries

10. David Popp
Alternative energy patents over time

11. 2) Design of Policy Instruments
• A wide‐range of environmental policy instruments are used
– Command & Control (CAC) policies provide specific performance
targets
– Market‐based policies establish a price for emissions
• Either directly (e.g. a carbon tax) or indirectly (e.g. through the use of
tradable permits)
David Popp

12. 2) Design of Policy Instruments
• Economists tend to prefer market‐based regulation over
command‐and‐control options because they provide greater
incentives for innovation
– Command‐and‐control regulation provides incentives to meet, but not
exceed, standards (Popp 2003)
– In contrast, market‐based options provide rewards for continual
improvement
David Popp

13. 65
70
75
80
85
90
95
100
75 78 81 84 87 90 93 96
year FGD unit intsalled
removalefficiency--3yearmovingaverage
David Popp
Source: Popp (2003)
Removal Efficiency of New FGD Units

14. 2) Design of Policy Instruments
• How to develop long‐term technologies?
– Problems such as climate change will require a diverse
range of technologies
– Will market‐based policies produce a diverse range?
• Policy options
Technology neutral
• Carbon tax
• Cap‐and‐trade
• Renewable Energy Certificates/Renewable Portfolio Standards
Technology‐specific
• Feed‐in tariffs
• Investment subsidies
David Popp

15. 2) Design of Policy Instruments
• Policies that let the market “pick winners” will focus research
efforts on technologies closest to market (Johnstone et al. 2010)
– Renewable energy mandates => wind innovation
– Guaranteed prices (e.g. feed‐in tariffs) => solar innovation
– Consider, for example, solar energy in Germany
• However, policies that promote specific technologies may increase
short‐run compliance costs
• Solutions?
– Combine broad‐based policies with limited subsidies for technologies
furthest from market (Fischer et al., RFF Working Paper, 2013)
– Use government R&D to support long‐term research needs (Acemoglu et
al. JPE 2016)
David Popp

16. 3) The Role of Energy R&D
• While R&D policy plays a role, remember it is not a substitute
for environmental policy
• Which technologies?
– To avoid duplicating, and potentially crowding‐out, private research
efforts, government R&D support should focus on:
• basic research
• technologies not yet close to market
• applied research whose benefits are difficult to capture through market
activity
– E.g. improved electricity transmission, energy storage
David Popp

17. 3) The Role of Energy R&D
• Can government funds increase commercialization?
– Howell (2015) finds that US DOE SBIR grants help small firms bring
technologies to market by funding technology prototypes
– Grant recipients are:
• 2X as likely to receive subsequent venture capital
• Produce more patents
• Earn more revenue
David Popp

18. 3) The Role of Energy R&D
• When evaluating public R&D, patience is important
– Lags between funding and publication are long (Popp 2016)
• 6‐10 years for full effect of funding
• An additional 3‐5 years for articles to generate new patent applications
• Evaluating public R&D requires patience from policymakers
– R&D is uncertain; some projects will fail
David Popp

19. 4) Technology Transfer
• Keep in mind that policy matters
– Technology transfer won’t occur unless there is demand for clean
technologies in the recipient countries
• Two key points for North America:
1. The U.S. market is key for creating demand
• While both domestic and foreign policies promote innovation activity,
foreign markets are larger
• In most OECD countries, overall effect of foreign demand on innovation is
twice as large as domestic demand (Dechezleprêtre and Glachant 2014)
• Particularly important for Canada
– U.S. market much larger than the local market
David Popp

20. David Popp
Source: Popp, forthcoming CD Howe policy brief
First filing country, USPTO patents from top patenting sources
Wind
Number of Patents % filed at home % filed US
United States 1542 99.3 N/A
Germany 377 78.5 13.5
Japan 144 78.5 2.8
Denmark 137 54.7 7.3
Canada 122 17.2 81.2
Solar
Number of Patents % filed at home % filed US
United States 4556 99.6 N/A
Japan 1105 96.3 1.7
Germany 422 91.9 2.8
France 148 93.2 3.4
Australia 121 86.8 12.4
Switzerland 86 67.4 8.1
Israel 99 49.5 48.5
Canada 96 17.7 73.9

21. 4) Technology Transfer
• Keep in mind that policy matters
– Technology transfer won’t occur unless there is demand for clean
technologies in the recipient countries
• Two key points for North America:
1. The U.S. market is key for creating demand
2. Technology transfer can increase adoption of regulation
• As technologies improve, the costs of environmental regulation fall
• International trade improves access to technology, leading to earlier
adoption of regulation (Lovely & Popp, JEEM, 2011)
David Popp

22. Conclusion
• Summary of key points
– Incentives matter
– Both broad‐based and targeted policies needed
• Targeted policies should focus on what market‐based policies won’t deliver
– Use public R&D to complement the private sector
– U.S. market is key for North America
David Popp

23. Thank You!
David Popp