theinnovationeffectsofenvironmentalpolicyinstruments–.docVIP

The innovation effects of environmental policy instruments – a typical case of the blind men and the elephant René Kemp and Serena Pontoglio Paper for DIME WP 2.5 Workshop on Empirical Analyses of Environmental Innovations, Fraunhofer Institute for Systems and Innovation Research (ISI), Karlsruhe, January, 17th-18th, 2008 Revised version of Jan 21, 2008 Abstract In this paper we examine the innovation effects of environmental policy instruments in four literatures: theoretical models on incentives for eco-innovation, econometric studies, survey analysis and case studies. These four research streams arrive at contrary claims, because of theoretical assumptions and methodological commitments. It is argued and shown that the theoretical and econometric studies fail to account for relevant factors and features of eco-innovation. It is here argued that case study analysis and survey analysis have much to offer and we will present the findings from these literatures, scrutinise these, something that has not been done before. The conclusion of the paper -- stated in the form of seven “issues for understanding” -- is that the effects of environmental policy instruments depend on the design of the instruments and the techno-economic and political context in which they are used. Policy instruments cannot be usefully ranked with regard to their effects on eco-innovation, and the statement from economists that market-based approaches such as pollution taxes and emission trading systems are better for promoting eco-innovation seems only warranted for non-innovative, or marginally-innovative, changes. 1. Introduction The economic desirability of environmental policy instruments depends on (1) the value of the expected environmental benefits, (2) the costs at which environmental improvements are achieved, and (3) the extent to which they stimulate innovation at the supply side or user side (dynamic efficiency). Dynamic efficiency may be even more important than stati