Directed technology and the environment

The subject of the previous post was Daniel Susskind’s book Growth: A Reckoning. Its author outlined measures that he believed could enable continued economic growth that did far less harm to society and the environment than has previously been the case. An important factor in this kind of growth would be steering technological progress in desirable directions through measures such as economic incentives. Susskind treats this idea broadly, but a more detailed exploration is found in the paper Environmental Policies and directed technological change by Gugler, Szücs and Wiedenhofer (2024). The authors examine how different environmental policies “can steer innovation towards eco-friendly technologies”, and produce numerical estimates of their effectiveness. The policies evaluated are those “designed to address environmental market failures”. Economists have seen climate change as a type of free market failure: a failure to maximise society’s welfare, since greenhouse gas emissions are a result of economically valuable activities, but are not properly costed. The authors see the directing policies as carbon pricing and taxes; environmental regulatory stringency; and green Research and Development (R&D) subsidies. They extract from their data numerical values measuring the effectiveness of such policies, and describe their results as encouraging.

The data used in the paper refer to the above policy areas, and to CO2 emissions, fuel prices, and value-added at industry level. Data came from records in Europe, the US and Canada. Green patents were classified as addressing zero emissions, reduced emissions or negative emissions; energy, transport and buildings; greenhouse gas capture, storage, sequestration or disposal. The data source for green patents was the European Patent Office. Data on natural gas prices, tax deductions, environmentally related regulatory policies and R&D subsidies came from the International Energy Agency; and CO2 emission figures from the Organisation for Economic Co-operation and Development (OECD). The Environmental Policy Stringency Index of the OECD was used to rate policies.

The authors accept the general view of economists that climate change is best tackled through a combination of carbon tax and research subsidies for green technologies. “Consumers and firms do not pay the full social cost of polluting the atmosphere” and setting a price on carbon can address the external costs of greenhouse gas emissions, such as the costs of flooding, drought, and damage to health and crops. It may be easier to set a carbon price than to know how much subsidy to give to R&D. The contribution of an innovation to human knowledge may exceed its initial material benefits, but allowing knowledge created by one company’s innovation to “spill over to other, competing companies for free” may stop the innovator from getting adequate returns on the innovation, and deter further investment in new and green technologies. However, the right combination of patent protection with state funding of basic research and appropriate R&D promoting policies can be effective in directing innovation. Support for recent technologies is also needed because the fossil fuel technologies “have been developed and optimized for a long time” giving them productivity advantages over newer technologies, which can struggle to become established.

Policy tools are widely used “without robust estimates of their individual and interaction effects on directed technical change” and the research tries to address this weakness by panel analysis of the effects of policy on green patenting activity. The method is fully described in the paper, and some of the technical terms are noted at the end of the post, together with sources of further information. The main variables are environmental tax revenues from energy, pollution, resource and transport; details of environmental regulation by sector, country, year and level of observation; R&D subsidies and state-level budgets in areas such as nuclear, renewables, energy efficiency, and hydrogen; and the share of R&D costs companies can recoup through the tax system.

The analysis indicated that all the main policies succeeded in directing innovation towards green patenting. In numerical terms, doubling environmental taxes in an industry, on average increases green patenting by 6.7%; doubling the stringency of environmental regulation in a NACE2 (European Classification of Economic Activities) industry produces a 16.4% increase; doubling direct state R&D subsidies leads to a 9% increase; and an increase of R&D tax deductions by 1 percentage point increases green patent applications by 0.3%.  However, policies can interact; for example R&D subsidies are less effective when applied together with environmental regulations. Understanding these interactions is therefore important in evaluating the cost effectiveness of policy measures.

Technical terms

Many of the terms used in the analysis section of the paper have entries on websites such as the Economics Terms Lexicon, Investopedia, Quickonomics and Wikipedia. For example Exogenous and endogenous variables, Panel data, Instrumental variables (IV) estimation, Money Supply (or money stock), and IS- LM model all have Wikipedia entries; Hausman Test and Two-Stage Least Squares (2SLS) technique are described on Quickonomics.

References

 

Economics Terms Lexicon, https://economicstermslexicon.com/

Gugler, K., Szücs, F., Wiedenhofer, T., 2024, Environmental Policies and directed technological change, Journal of Environmental Economics and Management, online, accessed 28 May 2025

https://www.sciencedirect.com/science/article/pii/S0095069623001341

Investopedia, https://www.investopedia.com/terms

Quickonomics, https://quickonomics.com/terms/hausman-test/

Wikipedia, https://www.wikipedia.org/

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