This case study outlines the tax on NOx emissions in Sweden, implemented in 1992. The tax rate is very high compared to other OECD jurisdictions but nearly the full amount is refunded to firms. Through a number of metrics, it was found that the tax did have significant impacts on innovation. Many of these were process innovations that made the firms’ existing operations less pollution intensive, even for firms not adopting capital-based abatement strategies. This case study also includes a theoretical exposition of the impact of the recycling mechanism on the incentives for innovation.

This case study explores water pricing in Israel in light of the constant pressures over water resources in this semi-arid region. It first looks at the differentiated approaches across industrial, agricultural and household uses, highlighting the fact that pricing reflects use, type of water and varies on quantity. The Israeli experience in conserving water is clearly a success and has been very innovative. A multitude of factors have contributed to this, including water pricing structures, government information campaigns and governments investments in water technologies.

This case study looks at the effect of emissions regulations, fuel efficiency standards, petrol prices and petrol taxes on innovation in the motor vehicle industry, focusing on the United States, Germany and Japan. The study finds that regulations on emission standards have generally induced innovation in related areas (for example, nitrous oxide emission regulation and innovations in engine design). The effects of petrol prices and petrol taxes on patenting are not as straightforward. Fuel taxes (which can be predicted) had an impact on innovations related to fuel efficiency, whereas petrol prices and fuel efficiency standards did not. However, further analysis of the interplay of taxes and prices highlight some of the empirical issues that result from analysing the innovation impacts of taxation.

This case study looks at the innovation impacts of Switzerland’s tax on volatile organic compounds. Introduced in 2000, the tax covers all emissions of VOCs in Switzerland – both in the production and in the consumption of products containing them. Focusing on three industries, the case study found that innovation did take place by firms. The vast majority of it, however, consisted of incremental innovations and homemade solutions that were not patented. Also highlighted were the barriers that individual firms face to innovating, such as capital equipment sourced from a large manufacturer. The tax on VOCs appears to have also led to significant environmental improvement.

This case study examines the impacts of two tax credits in Spain: one for R&D investments and the other for investments in assets that relate to the environment. The tax credit for environmental investments did not seem to induce innovation, partly due to the fact that the tax credit could be triggered for investments needed to comply with existing environmental policies. On the other hand, the R&D tax credit seemed to support environmental innovation, given the number of firms that made use of the environmental investments deduction after having used the R&D deduction.

This case study explores Korea’s policies towards NOx and SOx emissions. A capand- trade system was implemented in 2008 and was expanded the following year. Although too early to investigate the environmental and innovation impacts, this instrument builds on previous policies targeted towards the same pollutants. These policies bought about increased patenting but mainly in end-of-pipe technologies.

This case study investigates UK firms and the influence of various policy and market forces on their innovation response. There was a strong correlation between firm-level targets for energy use or greenhouse gas emission targets and R&D (both general and climate change related). Investor and customer pressure also appear to drive process innovation. The effect of the EU ETS was positive for overall innovation but not for climate change related innovation, highlighting the potential issues of predictability of the trading system or the issue of measuring innovation.

This case study examines the role of the UK’s Climate Change Levy (and associated negotiated Climate Change Agreements with industry) on innovation. Firms with CCAs, who were granted an 80% reduction in the rate of the CCL, tended to be more energy intensive and use more electricity (which was taxed the highest within the levy scheme) than similar firms paying the full rate. Firms paying the full rate did not appear to experience adverse financial or economic effects. Moreover, CCA firms were significantly less likely to innovate than firms paying the full rate, including in areas related to climate change.

This case study examines the Japanese tax on SOx emissions that was implemented in the 1970s to finance compensation to victims of air pollution. The tax rate rose very quickly after its introduction, peaking in 1987, when the system was reformed. Due to the tax, firms undertook significant abatement and adopted existing abatement technologies. However, the design of the tax brought about unpredictability of the tax rate and a lack of credibility of the overall system, ushering in a period of declining patenting in related technologies, despite increasing tax rates.