1. Green Growth and
Innovation
Nordic Innovation Forum Seminar on
Green Growth and Welfare
Reykjavik, 24 May 2012
Andrea Beltramello
Policy Analyst
Directorate for Science, Technology and Industry
Structural Policy Division

2. The need for green
2050
World GDP (2010, PPP)
USD 305 trillion Population: +2.2 billion
Energy: +80%
2030
USD 164
trillion
GHG emissions: +50%
Biodiversity: -10%
2020
USD 115
trillion
Water demand: +55%
2010
USD 77
trillion
Source: OECD (2012), Environmental Outlook to 2050

3. Risks in not going green: bottlenecks
Energy commodity price index Food Price Index
300,00 constant USD 2000 250,0
250,00
200,0
200,00
150,0
150,00
100,0
100,00
50,0
50,00
0,00 0,0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 1990 1993 1996 1999 2002 2005 2008 2011
Source: World Bank Source: OECD
And also:
• Pressures on natural capital
• Biodiversity loss
• Water scarcity
• Systemic risks (e.g. climate change)
• Pollution and human health

4. OECD’s Green Growth framework
Enabling conditions Major environmental
challenges
• Balanced tax structures
• Water scarcity
• R&D and innovation policy
• Competition • Climate change
• Infrastructure investment • Health impacts of pollution
• Openness to trade and FDI • Biodiversity loss
Key policies Promoting the transition
• Pricing of pollution and resource use
• Subsidy reform • Skills and labour market adjustment
• Regulatory and policy predictability • Distributional and competitiveness concerns
• Support to basic research and emerging • Science and technology cooperation
technologies • Development assistance
• Governance of natural assets • Management of global public goods
Measurement
• Productivity of resource use
• Physical evolution of the natural asset base
• Environmental quality of life
• Opportunities arising from environmental considerations
• Evolution of policy and social responses
• Promoting efforts consistent with international standards
Source: OECD (2011), Towards Green Growth

5. Challenges are so big that we can’t afford expensive
solutions – we are up against time and inertia so need
(lots of) innovation

6. Green innovation is much more than technological change…

7. … and involves also new business models
ESCO – Energy Saving CMS – Chemical
Companies Management Systems
Functional sales - generic model
for all green business models
DBFO - Design, Build, Sharing
Finance and Operate
7 Green Business Models in the Nordic region, www.fora.dk

8. What is Driving Green Innovation?
• Detailed analysis at the OECD on: renewable energy,
electric/hybrid vehicles, ‘clean’ coal, air and water pollution
abatement
• Relative prices, policy measures (e.g. standards) and public
R&D drive green innovation – but differs depending upon a
number of factors (i.e. maturity of technology)
• General innovative capacity and market conditions are often
the most important determinants – “a rising tide lifts all
boats”
• While environmental policy stringency matters, policy
stability and flexibility are also key – give investors
incentives for ‘search’ over planning horizon
Source: www.oecd.org/environment/innovation

9. Responses to different policy instruments
Relative impacts of policy on patent activity
12
R&D impact normalised to 1
Standard is US Zero Emission Vehicle standards
10
Standards
8 Fuel prices
6 Fuel prices
4
Standards
2 Public R&D Public R&D
0
Electric Hybrid
The histogram shows empirical estimates of elasticities, evaluated at sample means, and normalized in terms of the effect of
“public R&D spending” (R&D=1.0). Bars shown without fill represent estimates that are not statistically significant at the 5%
level. Source: OECD (2011), Invention and Transfer of Environmental Technologies .
9

10. Clear policy signals help
12
Patenting activity in Annex 1 ratification countries
11
(3-year moving average, indexed on 1990=1.0)
10 Wind power
9
8 Fuel cells
7
Lighting
6
5
Solar PV
4
3 Electric cars
2
1
All tech. sectors
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
1997- Kyoto Protocol
Source: OECD (2011), The Invention and Transfer of Environmental Technologies

11. Getting prices “right” is important …
NOx Tax in Sweden
• Swedish NOx tax 180
Patents increased; emission intensities 160 Marginal Abatement Cost
declined; Marginal Abatement Costs fell 140 Curvesof Taxed Emitters
• Swiss VOC tax
SEK per kg NOx
120
Firms were quite innovative and found 100
many solutions involving changes in 80
organisational and production practices 60
that did not result in patenting of technologies 40
• UK Climate Change Levy 20
Firms that agreed to a voluntary 0
emission-reduction agreement received 0 100 200 300 400 500 600 700 800 900
-20
a 80% reduction on carbon tax = > innovated Emission intensity in kg NOx per GWh
less 1991 1992 1994 1996
Graph based on: Hoglund-Isaksson (2005) cited in OECD (2011), Taxation, Innovation and
the Environment; based on observations from 55 plants in the energy sectors over the
period 1992-1996

12. … but is not sufficient…
• Sometimes difficult to target environmental ‘bad’ directly
and excessive administrative costs
• Range of other market failures – e.g. knowledge
externalities that limit private investment in innovation, but
also information failures, split incentives, network
externalities
• ‘Credibility’ of policy-induced price signals over the longer
term may not be sufficient for risky investments: scaling up
can be highly capital intensive and risky
• Inertia in the market can favour incumbent firms,
technologies and systems
• Evidence thus far suggests that better pricing mainly
induces incremental innovation.

13. ... in particular in overcoming inertia
Lifespan of capital investments
Residential water heating equipment
Residential space heating and cooling equipement
USD 16 trillion
Cars
Rents
Trucks, buses, trucks trailers, tractors
World GDP embodied
in fossil
Commercial heating and cooling equipement
fuel
reserves
Manufacturing equipement
Electric transmissions and distributions, telecom,…
USD 6.7 trillion
Power stations
Sunk
Building stock (residential and commercial) capital
Pattern of transport links and urban developments
0 50 100 150 200 250 300
Source: OECD (2012), Green Growth Studies: Energy; World Bank.

14. Public spending on energy and environmental R&D
has not kept pace with the challenge…
0.050 30.0
% of total Energy Technology R&D
% of GDP
0.045
25.0
0.040
20.0
0.035
0.030 15.0
0.025
10.0
Environment R&D (Left scale)
0.020
Energy R&D (Left scale)
Renewables (1) (Right scale) 5.0
0.015
0.010 0.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: OECD, R&D statistics and IEA database.

15. … but green innovation draws on a broad range of research

16. Implications for research policy
• Need greater investment in relevant research, which can
involve reorienting R&D spending
• Mission-oriented research (e.g. Apollo project) probably less
important – commercial application is key.
• Research should increasingly be multi- and interdisciplinary
– breakthroughs emerge from competition & cooperation.
• The effectiveness of funding depends on strong and effective
interactions between science and industry

17. Tailoring policy to technology maturity
Source: IEA (2010)

18. Implications for support policies
• Since technology-neutral pricing of externality is not
‘sufficient’ = > necessity to be ‘prescriptive’ (at least to some
extent) => main challenge for policy makers
• Some general principles:
– Support a ‘portfolio’ of technologies to diversify risk of getting it
“wrong”
– Benefits of chosen portfolio should be robust with respect to
information uncertainty (i.e. consider ancillary benefits)
– Identify “local general purpose technologies’ which complement a
variety of emission-reducing strategies, e.g. battery technologies,
instead of very specific applications

19. Demand-side policies play a role
• In fostering markets, in particular in areas where price
measures (e.g. carbon taxes) are ineffective or insufficient.
• Involves:
– Public procurement
– “Smart” regulation and performance standards
– Technology standards
– Specific pricing measures, e.g. French bonus-malus scheme
• These policies should also emphasize performance and
competition, rather than supporting specific technologies.

20. Public procurement
• Significant potential for fostering eco-innovations
• Design is crucial, e.g.UK Forward Commitment
Process: advanced information to market on future
needs; early engagement with potential suppliers;
incentives of a forward commitment
20

21. Performance-based regulations and standards
• Provide flexibility and stimulate firms to try out
new ideas, technologies, business practices
• E.g. design of Top Runner Programme: target
setting for average-fleet performance; continuous
review of targets and performance testing methods;
wide consultations with industry and other
stakeholders
21

22. Technology-based standards
• Deployment of eco-innovations in the presence of
information asymmetries and uncertainty
• Government as facilitator and co-ordinator of
industry efforts
• Examples of governments acting as facilitators:
standardisation of the smart grid in the United
States; standardisation of fuel-efficient tyres in
Japan
22

23. Pricing: the French bonus-malus scheme
• “Carrot and stick” 100 %
14 8,9
approach applied for 90 % 25,6 24,2
personal vehicles 80 %
according to CO2 70 % 35,6
41,3
emissions 60 %
50 % 43,4 45,3
• Possibility to make
40 %
fiscally neutral
30 % 55,5
• Clear shifts in 20 % 44,7
purchasing behaviour 31 30,4
10 %
0%
2006 2007 2008 2009
<60-130 131-160 161-250<
Source: FCA-Calculs CGDD.

24. Policy is not always cost-effective: the case of car scrapping
-50M€ -95M€
-10M€
France -100M€
“Prime à la Casse” ~555M€
-300M€
Car value Fuel CO2 NOx Accidents Net
savings avoided avoided societal
cost
-40M€ -305M€
-10M€
-410M€
Germany ~3000M
“Umweltprämie” €
-2235M€
Source: OECD/ITF (2011)

25. Managing distributional impacts
Job reallocation will increase ~ 1pc point more inter-sectoral job
reallocation by 2030 (10pc points 1995-2005)
% deviation from BAU in 2030 Employment Value added
50
40
30
20
10
0
-10
-20
-30
-40
-50
Source: OECD (2012), The job potential of a shift towards a low-carbon economy

26. 80
40
60
90
100
20
0
30
10
50
70
Air transport
Water transport
Electricity, gas and water supply
Coke, petroleum and nuclear fuel
Land transport
Basic metals
Other non-metallic mineral products
Chemicals rubber and plastic products
Mining and quarrying
Food products and tobacco
Printing and publishing
Textiles
Leather products and footwear
Wearing apparel and dressing
Other transport equipment
Social, private and sportal activities
Wood and products of wood and cork
Fabricated metal products
Motor vehicles, trailers and semi-…
Real estate, renting and business…
Source: EU-LFS, GTAP database, EU-KLEMS database
Construction
Machinery and equipment, n.e.c.
Public admin., health and education
Wholesale and reatil trade
Manufacturing n.e.c. and recycling
Office, accounting and computing…
total employment in OECD countries
Financial intermediation
Post and telecommunications
industries
(% of total CO2
Most polluating
fuel combustion)
Adjustment may not be as widespread as you’d think
Cumulative share of
Cumulative share of
CO2 emissions from
“Brown jobs” are easier to identify, but also account for only a small share of
emissions from fossil
fossil fuel combustion
total employment share
(% of total employment)

27. The welfare implications of CCM policies
Cost of GHG mitigation: GDP and GDP+
(Impact in 2050 of a 50% cut compared to 2005)
Source: de Serrres and Murtin (2011), A Welfare Analysis of Climate Change Mitigation Policies.

28. The policy mix for green innovation
• No silver bullet, range of policies needed
• Stable long-term policy signals, better pricing.
• Supply and demand: Strengthening incentives and
markets, and development of new alternatives
• Competition between technologies is key; and,
• Guard against lock-in – support broad range of options,
including general-purpose technologies such as ICT.
Source: OECD (2011), OECD Green Growth Studies: Fostering Innovation for Green Growth.

29. Policy Challenges
• Providing policy predictability in conditions of
imperfect and changing information
• Providing a mix of incentives that induce
solutions from ‘close-to-market’ up to
‘breakthrough’
• Directing technological change onto a green
trajectory without being “unduly” prescriptive
• Building international cooperative solutions for
environmental problems which stretch widely
across space and time

30. Forthcoming green innovation work
From the OECD Committee on Industry, Innovation and
Entrepreneurship:
• Driving eco-innovation: the role of demand-side
policies
• Business models for systemic eco-innovations
• Market development for green cars

31. Thank you!
For further information:
www.oecd.org/greengrowth
www.oecd.org/sti/innovation/green
andrea.beltramello@oecd.org