Innovation is a key driver of productivity and economic growth. It can help achieve environmental objectives at lower costs, and lead to new business opportunities and markets. It is widely acknowledged that far-reaching innovation will be needed to address climate change and other environmental challenges, and to accelerate the transition to green growth.

A well-managed transition to a greener economy is at the heart of the green growth model. It involves a shift to cleaner products and production processes, substitution of dirty inputs for cleaner ones, and a shift to consumption patterns with lower environmental footprints such as the sharing economy. They also comprise increased reuse, repairing and recycling, and overall moderation of consumption – particularly of resource-intensive goods and services.

Foreign sources of public and private finance can be useful in countries lacking sufficient access to domestic sources of finance. They can help catalyse investment for environmental projects and technologies, thus fulfilling the twin development-environment objectives. Public and private sources of international finance can also contribute to cross-border exchange of know-how and skills, foster local entrepreneurship and strengthen local absorptive capacity. This, in turn, can facilitate international technology transfer.

Market-based instruments play a key role in facilitating the transition towards green growth. Compared to regulatory instruments, such as emission limits or prescriptive technology standards, environmentally related taxation encourages the lowest-cost abatement across polluters. It also provides incentives for abatement at each unit of pollution. In addition, the revenue raised can be used to support fiscal consolidation or to reduce other taxes (e.g. taxes on labour and capital that distort the labour supply and saving decisions). Shifting the overall tax burden away from labour and capital towards environmentally harmful consumption and production patterns, while maintaining the overall level of redistribution constant, can improve economic efficiency.