Inducing environmental innovation is a significant challenge to policy makers; not least because two types of market failures – environmental degradation (a negative externality) and knowledge spillovers (a positive externality) – co exist and need to be overcome. Efforts to design public policies that address these failures are motivated by the fact that innovations can allow for improved environmental quality at lower cost.

It has long been recognised that the characteristics of any environmental policy framework can affect the rate and direction of innovation in environmental technologies. Environmental policies have the effect of changing relative input prices. In doing so, they encourage research on technologies which save on the use of the more expensive inputs.

It is often argued that market-based instruments are a preferable means of encouraging innovation than direct forms of regulation, drawing a stark contrast between the two. In this chapter it is argued that it is more helpful to think in terms of the more general characteristics of different policy instruments, including policy stringency, predictability, flexibility, depth and incidence. Some of these questions are further examined empirically drawing upon a rich database of patent data. It is found that while stringency of environmental policy is important, predictability and flexibility of policies indeed matter as well.

Flexibility of the national policy framework and international policy co-ordination are two key factors that affect international transfer of environmental technologies. In this chapter, empirical evidence is provided that indicates that the degree of flexibility of national environmental policy regimes has a positive effect on technology transfer. Flexibility ensures that markets are not fragmented across different countries as would be the case with prescriptive regimes. In the second case, we also examine whether adherence to a series of international agreements on reducing SOX and NOX emissions has induced the transfer of technologies between signatory countries. Supporting descriptive and econometric evidence to this end is provided.

Policy instruments are often introduced in combination, sometimes with different but related environmental objectives. In this chapter, the relative importance of fleet-level fuel-efficiency standards, after-tax fuel prices, and public support for R&D is examined using data on patenting activity in alternative-fuelled vehicles. It is found that relatively minor changes in a performance standard or automotive fuel prices would yield effects that are equivalent to a much greater proportional increase in public R&D budgets. However, there are significant differences between types of technologies – electric and hybrid vehicles. Our results suggest that appropriate sequencing of policy measures is important.

Encouraging innovation in material recycling and waste management technologies has been on the agenda in many countries for several decades. In this chapter, the data presented indicate the possibility that the first wave of policies (end of the 1980s, beginning of the 1990s) has produced an innovation response, but their effect is now less pronounced. Technological maturity of this sector, relative to other areas of environmental innovation, is one possible explanation for this finding. Nonetheless, in many countries recycling rates have increased and waste generation per unit of economic activity is beginning to fall. It is likely, that for mature sectors responses to environmental policy shocks may be reflected in behavioural and organisational innovations, rather than in terms of technological inventions.

Improving the environmental performance of chemical processes and feedstocks has become an objective of the chemical industry and policymakers alike In this chapter, indicators of innovation in selected fields of green chemistry are proposed using patent data. Among these, biochemical fuel cells and green plastics are the two areas that have shown the most growth, while totally chlorine-free pulp and paper and biodegradable packaging are past their innovation peak. Patenting in industrial biotechnology has increased but no more than for the chemistry sector overall. Qualitative review of the role of public policy indicates that innovation in this area requires avoiding differentiated treatment of new versus existing chemicals. In addition, the frequent use of support measures (R&D support, public procurement, grants, and awards) means that policy makers face a difficult task in identifying particular technologies or activities to be supported in the face of imperfect information and uncertainty over future trajectories.

In this book the potential impacts of environmental policy on innovation have been analysed in a wide variety of fields (i.e. motor vehicles, solid waste, regional air pollutants, green chemistry). The research presented draws upon a worldwide database of patent applications and introduces an indicator of innovation in technologies related to the mitigation of environmental impacts. A number of key conclusions emerge from the different chapters.

This book presents analyses of the determinants of environment-related innovation – assessing the relative importance of different factors (policy measures, market conditions, scientific capacity, etc.) on the rate and pattern of innovation and the diffusion of these inventions in the world economy. Both of these strands of work depend on the availability of appropriate indicators. This annex reviews the methodological aspects of development of such indicators. It is intended to serve as a reference document for papers arising out of this work.

Detailed search strategies are presented for the identification of environment-related technologies using patent data.