Kristna M. Lybecker, Ph.D., Associate Professor of Economics and Business at Colorado College, 14 E. Cache la Poudre Street, Colorado Springs, Colorado 80903, This email address is being protected from spambots. You need JavaScript enabled to view it..

Abstract

Innovaton is an inherently risky and uncertain process. Many of the broader challenges to innovaton in general are both mirrored and exaggerated in clean technology innovaton. The development of environmental technologies is further complicated by the public goods nature of knowledge, environmental externalites, and uncertainty. This study on clean technology focuses on recent work on the role of uncertainty, the partcipaton of emerging and developing natons, the controversy surrounding intellectual property rights, and the variety of market actors and strategies in place. The paper also considers the policy instruments that are available, the cost, benefts and consequences of their use. As scholars contnue to analyze when, where, why and how clean technology innovatons are developed and adopted, it is essental that government policymakers aim to reduce uncertainty and risk, incentvize innovaton with effectve intellectual property rights, and foster transparency in the market. This contnues to be a feld of increasing future importance, and a rich area for contnued academic study and analysis. Consumers, government policymakers and innovators would all beneft from a greater understanding of the process of technological change in the development, diffusion and fnancing of clean technologies.

INTRODUCTION

Innovaton is an inherently risky and uncertain process. Many of the broader challenges to innovaton in general are both mirrored and exaggerated in clean technology innovaton.1 The four primary challenges for such innovaton are externalites, uncertainty, asymmetric informaton, and market power. Clean technology is characterized by two market failures: the public goods nature of knowledge and environmental externalites. In additon, uncertainty regarding the qualites of the innovaton, as well as future prices of inputs and substtutes will complicate the development and adopton processes. Ultmately, uncertainty and changing regulatons may both encourage and inhibit clean technology innovaton, providing policymakers with a critcal and challenging role in the process.

Innovaton is best encouraged with market forces and incentves. However, in the case of environmental technologies, the presence of dual externalites inhibits the innovatve process (Hall and Helmers, 2010). The combinaton of knowledge spillovers from research and development efforts and the public goods nature of these technologies provide a clear case for government interventon and policy (Popp, Newell and Jaffe, 2009; Hall and Helmers, 2010; Popp, 2010; Popp, 2012). Without effectve public policy, markets alone are not likely to provide sufcient incentves for the development of clean technology innovatons. Markets for new technologies are frequently characterized by uncertainty surrounding adopton, the impact on markets for competng and complementary products, applicaton of the existng legal system, enforcement of intellectual property rights, and acceptance in internatonal markets (Groba and Breitschopf, 2013; Kalamova, Johnstone and Haščič, 2013; Hall and Helmers, 2010; Popp, 2010; Heal, 2009). Innovatve industries would beneft from greater predictability in each of these areas (Popp, Newell and Jaffe, 2009; Johnson and Lybecker, 2009a, 2009b, 2009c, Popp, 2010).

The market for clean technologies is characterized by signifcant uncertaintes and risks, making the transfer of environmental technologies partcularly difcult. As described here this is especially true for developing natons and presents distnct challenges for their adopton of clean technology innovaton. While market forces and market failures shape the environmental technology sector, politcal and cultural forces further complicate every aspect. In partcular, it is important to recognize the role of regulaton in the development of environmental innovaton. As described in a review of earlier literature, environmental regulaton may result in cost-saving innovaton if a) the fxed costs of innovaton are lower than compliance plus producton, or b) spillover effects make innovaton strategically a bad idea for the frm but a good idea for the society, or c) regulaton helps to fx incentve problems between managers and owners, or d) regulaton helps to clear informaton flow (Johnson and Lybecker, 2009a). Nonetheless, a number of clear conclusions can be drawn, as outlined above and discussed in further detail below.

This paper summarizes some of the key results from an updated literature review that tracks and further builds upon three 2009 literature reviews on clean technologies (Johnson and Lybecker, 2009a, 2009b, 2009c). The earlier studies examined the challenges surrounding three aspects of clean technology: its development, disseminaton and fnancing. As in this review, they looked at technology innovaton, transfer, and use, and in doing so also considered the types of factors that determine a country’s success in creatng a natonal system of innovaton and technology disseminaton. This new literature review builds upon those papers, focusing on the most recent contributons to the literature.2 The following sectons focus on enabling environmental innovaton, technology disseminaton and use, the role of intellectual property rights, and the specifc challenges facing developing countries. The paper concludes with a descripton of key fndings and a discussion of the importance of balance in environmental policymaking.

ENABLING ENVIRONMENTAL INNOVATION, TECHNOLOGY DISSEMINATION, AND USE

Spending on research and development (R&D) by the U.S. government in the energy sector contnues to be relatvely small, when compared to other industries and sectors, though it has increased in recent years. Given this, private investment is and will contnue to be critcal to funding the research and development that results in environmental innovatons. Figure 1 plots nondefense research and development spending for the United States, 1953-2013. While the experience of the United States is not universal, it is illustratve since the United States is the source of the greatest share of these innovatons. The American Associaton for the Advancement of Science reports that in 2012 the United States spent $4.36 billion on non-defense energy research, double the amount from a decade ago. While energy has been the fastest-growing category of research and development spending, when adjusted for inflaton, it contnues to comprise a much smaller porton of the federal budget than health or space research (Plumer, 2013). In additon, since fossil fuels receive close to one-quarter of the federal funding it is perhaps not surprising that there is a dearth of research on funding for clean technology innovaton.

Figure 1. Federal R&D Outlays for the United States, billions of USD
source: Plumer (2013).

Environmental innovaton is characterized by dual externalites: (1) private underinvestment in research and development (R&D) due to knowledge spillovers and (2) environmental externalites.3 While each externality presents signifcant challenges, the two externalites interact which compounds the problem. Moreover, both externalites operate on a global scale, further complicatng the issues of regulaton, mitgaton and cooperaton.

In both the development and the diffusion of environmental technology, the challenges surrounding uncertainty loom large. From beginning to end environmental innovaton is characterized by uncertainty: uncertainty about actual costs, uncertainty about the end-product of a research process, uncertainty about the recepton by the market, uncertainty about the ability to appropriate the returns to research while compettors try to produce similar results, uncertainty about current and future policies and regulatons, uncertainty surrounding the pricing of competng as well as complementary goods, and uncertainty about regulatory impacts on the research process and end-result. This is exacerbated by the uncertainty surrounding the rate of innovaton itself which complicates any estmate of global climate change, making it difcult to substantate the reasons that justfy further research funding. One of the key challenges, therefore, is for governments to reduce such uncertaintes and create a stable and predictable regulatory and market environment that enhances innovaton, and the development, diffusion and disseminaton of technology.

Technological innovatons are of minimal value if the society fails to adopt them and make use of them. As noted by Popp, Newell and Jaffe (2010), litle scholarship has focused specifcally on the internatonal transfer of environmental technologies and that gap in the literature remains today. However, beyond the transfer of these technologies, diffusion and adopton are paramount to the ultmate usefulness of a new technology. It is not uncommon for a superior technology (in terms of performance and/or cost) to reach the market and fail to be widely adopted. Accordingly, it is important to examine the forces that contribute to the disseminaton of technology.

Beyond the issues surrounding market and behavioral failures there are other factors that both facilitate and inhibit the diffusion of environmental technologies. While much work remains to be done in this area, existng work can illuminate some of the factors that mater to the diffusion and adopton of environmental technologies. Consider Table 1 below which provides a summary of the key research on the cost-effectveness of past U.S. energyefciency programs. Within the table, Popp, Newell and Jaffe (2010) identfy the barriers to adopton as well as the key results from each paper.

Table 1. Barriers to adopton of environmentally-friendly technologies
ArtcleTechnologyBarrier(s) to AdoptonDataKey Results
Jaffe and Stavins (1995) Thermal insulaton Up-front costs mater more US residental constructon 1979-88 Lower adopton costs 3x more likely to encourage adopton than increased energy costs
Hasset and Metcalf (1995) Residental energy conservaton Up-front costs mater more US households 1979-1981 Installaton cost savings via tax credits encourage adopton
Kemp (1997) Thermal home insulaton Inadequate informaton Netherlands households Government subsidies do not lead to adopton. Epidemic model fts data beter than ratonal choice model.
Metcalfe and Hasset (1999) Atc insulaton Inadequate informaton U.S. Residental Energy Consumpton Survey, 1984, 1987, & 1990 Actual energy savings are less than promised
Reppelin-Hill (1999) Clean steal technologies Import barriers Adopton of electric arc furnace in 30 countries, 1970-1994 Import barriers restrain the adopton from foreign-produced goods
Howarth et al. (2000) Energy-saving technology (efcient lightng equipment) Agency decision making problems, Inadequate informaton Green Lights and Energy Star programs Voluntary programs lead to wider adopton in private frms. Inadequate informaton inhibits adopton.
Nijkamp et al. (2001) Energyefcient technology Economic barriers - alternatve investment - low energy costs - capital replacement Survey of Dutch frms Economic barriers affect adopton more than fnancial and uncertainty barriers
Mulder et al. (2003) Energy efciency technologies Complementarites among technologies N/A Complementarites and learning-by-doing process impede adopton
Anderson and Newell (2004) Firm-level adopton of energy-saving projects recommended by energy audits Inadequate informaton on technologies, Inital costs and payback years of adopton U.S. Department of Energy’s Industrial Assessment Centers database, 1981-2000 Firms adopt additonal projects with improved informaton. Up-front costs have 40% greater effect than energy costs.
source: Popp, Newell and Jaffe (2010, p.70).

It is important to recognize that the disseminaton of technology may depend on achieving an efcient scale of producton, so as to reduce perunit producton costs and facilitate adopton. Given that a majority of environmental innovatons are subject to economies of scale or increasing returns to scale, greater levels of output will generate lower per-unit costs which may indicate that larger frms are beter able to both develop and deliver environmental technologies. “This beneft associated with the overall scale of technology adopton has sometmes been referred to as ‘dynamic increasing returns,’ which may be generated by learning-by-using, learning-bydoing, or network externalites. Thus, just like the creaton of the technology itself, informaton about the performance of a technology has an important public goods component.” (Popp, Newell and Jaffe, 2010, p.4) Accordingly, Popp, Newell and Jaffe note that the value of an innovaton to one individual/ frm may be dependent on the number of other users who have adopted the innovaton (Popp, Newell and Jaffe, 2010). Across countries and technologies, in the presence of economies of scale, users will beneft from an increasing number of other users.

Henderson and Newell (2010) explore the history of innovaton in several industries that may hold lessons for the energy industry. They focus on industries that have experienced extraordinary rates of technological progress and draw out four themes believed to be partcularly important to energy innovaton. These are: sustained federal support for fundamental research over a long period of tme; effectve governance balancing public and private funding such that private resources are not crowded out; welldesigned insttutonal mechanisms for effectve technology transfer; and the critcal importance of public funding for training the scientfc and technical personnel who become the backbone of an innovaton private sector. The importance of public funding is striking given the relatvely low levels of existng funding. That is, “publicly funded energy research consttutes about 3 percent of the total federal R&D budget or less than 0.03 percent of gross domestc product.” (Henderson and Newell, 2010, p.5) Notably energy R&D budgets have risen most recently and were dramatcally increased under the American Recovery and Reinvestment Act which added $14 billion in spending in 2009. In a descripton of the importance of slow and steady growth in R&D budgets, Popp (2010) describes the experience of the U.S. Natonal Insttutes of Health (NIH), as analyzed by Freeman and van Reenen (2009). The studies draw striking parallels between the felds of medicine and energy, focusing on the importance of allowing tme for the development of young talent in the feld.

Any analysis of the development and disseminaton of environmental technologies is complicated by the variety of market enttes involved in environmental innovaton: commercial and industrial frms, government organizatons, academic insttutons, non-governmental organizatons, as well as combinatons of all of these agents through partnerships and joint ventures. Their roles both support and complement the actvites of traditonal market actors. Research coordinaton agreements remedy market failures in the development and diffusion of environmental innovaton, preventng duplicatve R&D efforts. Partnerships and joint ventures allow clean technology frms to increase their presence in developing country markets.

Numerous studies conclude that an unambiguous ranking of policy instruments is not possible given the variety of factors that play into their valuaton: the policymakers’ preferences, perceived costs of environmental externalites, the innovator’s ability to appropriate knowledge spillover benefts, and the state of technology, among others (Popp 2010, Borenstein 2011).

As previous studies have frequently concluded (Johnson, Lybecker, 2009c), the literature on fnancing environmental innovaton is very limited and has litle to offer in terms of the benefts of private versus public funding or the merits of one fnancing mechanism over another. The most effectve mechanism will undoubtedly depend on the type of technology, the maturity of the market, competng technologies, the lifecycle stage of the technology, and the risk and uncertainty surrounding the development process. In this vein, Stewart, Kingsbury and Rudyk (2009) point to the need for a variety of new arrangements to generate public and private fnancing for climate technologies since there is no one-size-fts-all soluton. Ultmately the best case scenario would encourage fnancing and remove barriers to entry while allowing the wisdom of the market to prevail and guide investment choices.

THE ROLE OF INTELLECTUAL PROPERTY RIGHTS

A majority of economists agree that strong intellectual property rights are an essental prerequisite to the development of environmental technologies (Hall, 2014; U.S. Chamber of Commerce, 2013; Mansfeld, 1986). Moreover, the majority of economic studies indicate that intellectual property rights are not a barrier to the transfer of technology to developing countries, though the concern remains a prominent theme in the literature (for a review of this literature, see Copenhagen Economics 2010). Although the value of patents, and other forms of protecton, varies across countries, across industries and across innovatons, numerous studies have documented the reasons to encourage strong patent law (Moser 2013, Copenhagen Economics 2010, Hall and Helmers 2010, Mansfeld 1986, among many others). The majority of the studies examining environmental innovaton focus on the effectveness of patent protecton rather than intellectual property rights in general or other forms such as trade secrets, trademarks, or copyrights. The other instruments are found to be much less important for technology transfer. While disseminaton of environmental innovatons is enhanced by stronger levels of patent protecton, it is essental to acknowledge the necessity of complementary factors such as infrastructure, absorptve capacity, effectve government policies and regulatons, knowledge insttutons, access to credit and venture capital, skilled human capital, and networks for research collaboraton.

Theoretcally the queston of whether IPRs facilitate or inhibit technology transfer amounts to a trade-off between the potental of intellectual property rights enforcement raising the cost or limitng access to protected innovatons against the potental for IPR protecton to facilitate trade and foreign direct investment, which are themselves valuable means of technology transfer (Allan, Jaffe and Sin, 2014). However, rather than serve as a barrier there is evidence that inadequate intellectual property rights or weak enforcement of such rights are a barrier to technology transfer. A 2010 study by the World Bank examines precisely this issue in the context of renewable energy producton.

“When enforcement of intellectual property rights (IPR) is perceived to be weak, foreign frms may not be willing to license their most sophistcated technologies, for fear that compettors will use it—which is the situaton for wind equipment in China. Weak IPR enforcement also discourages foreign subsidiaries from increasing the scale of their R&D actvites and foreign venture capitalists from investng in promising domestc enterprises.” (World Bank, 2010, p.309)

Consider Figure 2 below which maps the intellectual property rights performance of natons across the globe in the wind power industry. While Brazil, China4, India and Turkey have all received investments in local manufacturing and R&D, very few patents are registered in these natons presumably due to their weak IPR regimes (World Bank, 2010).5 Alternatvely, one could conclude that this is due to the lack of inventve capacity, necessary skills and knowledge within these natons.

Figure 2. Middle-income countries are atractng investments from the top fve wind equipment frms, but weak intellectual property rights constrain technology transfers and R&D capacity
source: World Bank (2010, p.309).

According to the World Bank study, in the context of low-income countries, weak IPRs do not appear to be a barrier to the transfer of sophistcated climate-smart technologies. Clear, predictable and well-enforced IP rights can facilitate technology transfers to these natons. While the World Bank’s World Development Report emphasizes the importance of other forms of IP protecton, strong trade secret protecton is also critcal. It has been shown, in partcular, to be relevant to the growth of small businesses, which empirical studies have shown to play a substantal role in innovaton (Lerner 1995; Lemley 2008). Given that trade secrets are signifcantly less expensive to obtain, maintain and enforce relatve to patents, small businesses rely disproportonately on trade secrets to protect their innovatons. Due to the risks of industrial espionage, this is partcularly true of innovatve small businesses in high technology sectors. In the words of Stanford Law School Professor Mark Lemley, “Trade secret law develops as a substtute for the physical and contractual restrictons those companies would otherwise impose in an effort to prevent a compettor from acquiring their informaton” (Lemley, 2008, p.335). Strong trade secret protecton provides employers with a degree of freedom otherwise unavailable to them. That is, it allows frms to seek out and hire employees based on their skills rather than loyalty. Employees are assigned responsibilites where their talents are the most benefcial, instead of making those decisions based on the risks of compromising confdental informaton.

The security of trade secrets and the strength of trade secret protecton will also influence a frm’s investment decisions. The U.S. Chamber of Commerce study, cited above, notes that a lack of trade secret protecton or ineffectve enforcement of relevant laws may lead companies to “make excessive investments in ensuring physical protecton for their secrets, rather than in innovaton” (U.S. Chamber of Commerce, 2013, p.6). These fndings are also evident in the empirical work of Png (2012), who analyzes the link between the historical evoluton of trade secret protecton in the United States and the corresponding levels of R&D investment. Png fnds that greater trade secret protecton is correlated with greater R&D investments in R&D-intensive industries.

Finally, the work of Kanwar and Evenson (2009) examines the relatonship between higher levels of IP protecton and R&D spending in a sample of 44 countries over the period 1981-2000. They fail to fnd a robust correlaton between R&D intensity (R&D expenditure as a percentage of GDP) and IP strength. Hall and Helmers conclude that it is impossible to draw clear conclusions from the literature on the link between intellectual property rights and domestc development. “While there exists some coherent evidence pointng to the importance of IPRs for domestc innovaton, especially in certain industries, there is also convincing (historical) evidence questoning the robustness of this relatonship.” (Hall and Helmers, 2010, p.17) By contrast, Park and Lippoldt (2008) do fnd a positve correlaton between the strength of IPRs and the number of patent applicatons by developing countries in additon to R&D expenditure as a share of GDP. They conclude that stronger IP rights are benefcial to domestc development of technology in developing natons and, as such, their fndings appear to be more in line with the overwhelming directon of the economic literature on the topic.

An extensive review of the literature on patent protecton is provided by Hall and Helmers (2010), in which they conclude that stronger intellectual property rights encourage innovaton in general. Moreover, IP protecton seems to facilitate technology transfer to middle-income countries with sufcient absorptve capacity. Within the clean technology sector, there is an extensive variety of different technologies available for emission reductons. In additon, a signifcant proporton of these innovatons as well as the underlying technologies are in the public domain. It is expected that the majority of technological progress will come from incremental improvements of existng off-patent technologies, especially as technologies are adapted for local conditons. Although these incremental innovatons may be patentable, there is plenty of room in the market scope for competng technologies and which limits the role specifc patents may play for technological progress in this area (Hall and Helmers, 2010; Johnson and Lybecker, 2009a).

THE SPECIFIC CHALLENGES FACED BY DEVELOPING COUNTRIES

While there is a small literature focused on the link between intellectual property rights and the development and disseminaton of environmental innovatons, very few studies examine the experience of developing countries (Popp and Newell, 2009). However, this is a very important issue since there is so much debate over the role of intellectual property in facilitatng or inhibitng the adopton of clean technologies in developing countries. A focus on developing countries is critcal because as described by Popp (2012), in 2010, 75% of the growth in CO2 emissions came from non-OECD countries, and the emissions from these natons are projected to be double those of OECD natons by 2035. Given this, the design of policies that facilitate the transfer of clean technologies to developing natons has been a clear focus in climate negotatons.

Environmental innovaton contnues to be concentrated in developed natons. Accordingly, the lion’s share of patents for these technologies is issued by the patent ofces of industrialized economies. Table 2 below shows the share of climate patented inventons by country, for the period 2007 through 2009.6 The United States, Germany and Japan clearly dominate this sector, though China does make the top ten list.

Table 2. Top ten inventor countries in climate innovaton and selected emerging economies
RankCountryShare of world climate patented inventons (2007-2009)
1 USA 19.0%
2 Germany 18.7%
3 Japan 17.5%
4 South Korea 5.6%
5 France 4.8%
6 UK 3.6%
7 Italy 3.4%
8 Canada 2.7%
9 China 1.7%
10 The Netherlands 1.6%
Total top 10 78.6%
18 Taiwan, China 0.9%
21 India 0.7%
22 Russia 0.5%
25 Brazil 0.4%
31 South Africa 0.2%
source: Glachant, Dussaux, Ménière, and Dechezleprêtre (2013, p.5).

Figure 3 below takes a closer look at environmental innovaton, by specifc technology.7 Again, the most innovatve natons listed above are among the most actve in each of the technologies identfed in fgure. Figure 3 identfes the share of patent applicatons in energy-related technologies between 2006 and 2010. The graphs display data for solar energy, fuel cell technology, wind energy, and geothermal energy.

Figure 3. Share of patent applicatons in energy-related technologies for the top origins (2006-2010)
source: De Plooy (2013).

Recognizing that the majority of environmental innovaton takes place in industrialized natons, it is valuable to examine what should be done to expand the rate of environmental research and development in all natons. In Table 3, the World Bank presents a summary of the key natonal policy priorites needed to facilitate environmental innovaton, by natonal income level. These recommendatons address a number of the challenges and problems surrounding environmental innovaton: dual externalites, uncertainty, insufcient incentves, government regulaton, and policy interventons (Groba and Breitschopf, 2013; Kalamova, Johnstone and Haščič, 2013; Popp, 2012; Popp, 2010, Hall and Helmers, 2010; Popp, Newell and Jaffe, 2009; Heal, 2009; Johnson and Lybecker, 2009a, 2009b, 2009c).

Table 3. Key natonal policy priorites for innovaton in countries of different income levels
CountriesMain Policies
Low-income Invest in engineering, design, and management skills
Increase funding to research insttutons for adaptaton research, development, demonstraton, and diffusion
Increase links between academic and research insttutons, the private sector, and public planning agencies
Introduce subsidies for adoptng adaptaton technologies
Improve the business environment
Import outside knowledge and technology whenever possible
Middle-income Introduce climate-smart standards
Create incentves for imports of mitgaton technologies and, in rapidly industrializing countries, create long- term conditons for local producton
Create incentves for climate- smart venture capital in rapidly industrializing countries with a critcal density of innovaton n(such as China and India)
Improve the business environment
Strengthen the intellectual property rights regime
Facilitate climate- smart foreign direct investment
Increase links between academic and research insttutons, the private sector, and public planning agencies
High-income Introduce climate- smart performance standards and carbon pricing
Increase mitgaton and adaptaton innovaton and diffusion through subsidies, prizes, venture capital incentves, and policies to encourage collaboraton among frms and other sources and users of climate- smart innovaton Assist developing countries in enhancing their technological absorptve and innovatve capacites
Support transfers of know- how and technologies to developing countries
Support middle- income- country partcipaton in long- term energy RDD&D projects
Share climate change–related data with developing countries
All countries Remove barriers to trade in climate- smart technologies
Remove subsidies to high- carbon technologies
Redefne knowledge- based insttutons, especially universites, as loci of the diffusion of low- carbon practces
source: World Bank (2010, p.303)

The 2010 World Development Report notes that stronger intellectual property rights should be a priority for all but the lowest-income natons. In additon, improvements in the business environment and greater funding for research insttutons are widely recommended. Finally, innovaton is universally enhanced by the removal of trade barriers in environmental technology sectors (World Bank, 2008a, 2008b; World Trade Organizaton, 2014). The World Trade Organizaton (WTO) describes this as a Win-Win-Win, pointng to the importance of trade negotatons in facilitatng “the reducton or eliminaton of tariff and non-tariff barriers (NTBs). Domestc purchasers, including business and governments at all levels, will be able to acquire environmental technologies at lower costs. In additon, liberalizing trade in environmental goods will encourage the use of environmental technologies, which can in turn stmulate innovaton and technology transfer.” (World Trade Organizaton, 2014, p.1) The potental impact of removing trade barriers is striking. As estmated by the World Bank, “Eliminatng tariff and nontariff barriers on clean energy technologies—such as cleaner coal, wind power, solar photovoltaics, and energy- efcient lightng—could increase their traded volume by 14 percent in the 18 developing countries that emit high levels of greenhouse gases.” (World Bank, 2010, p.308)

In an examinaton of six energy sectors (wind, solar, photovoltaic, concentrated solar power, biomass-to-electricity, cleaner coal, and carbon capture), a 2009 study by UK think tank Chatham House fnds that most patentng actvity is concentrated in large, developed economies.9 Of the six technology sectors considered, they found that for all but one of the top ten geographic locatons of patent assignees or owners are OECD economies. The United States tops the list, followed by Japan, Germany, China, Korea, and the UK (Lee, Lliev, and Preston, 2009). In line with the fndings of Lanjouw and Mody (1996), Dechezleprêtre et al. (2011), and Popp (2012), the technologies of greatest use, measured by the percentage of patents that have corresponding applicatons in other countries, are almost exclusively from developed economies.

While the majority of environmental innovaton emerges in developed countries, some developing countries are also making strides in this directon. The limited evidence that exists indicates that there is signifcant heterogeneity in innovatve capacity across developing natons, and that countries fall into one of two groups (Hall and Helmers 2010). Emerging economies, primarily Brazil, China, India and Mexico, have begun to develop environmental technologies and gain a share in the global market for renewable energy technologies. In contrast, a larger group of less-developed countries have yet to make such progress. As in the case of the broader literature on technology development and disseminaton, “the evidence on clean technologies suggests that a strengthening of IPRs for the group of emerging economies will most likely have a positve impact on the domestc development of technology and its transfer from developed economies. The available evidence does not allow drawing a similar conclusion in the case of less developed countries.” (Hall and Helmers, 2010, p.29) While stronger patents and IP rights encourage technology transfer to developing natons, through imports, FDI and licensing, they appear to have a negligible effect on technology transfer to the lowest income nations.

For many developing natons, foreign direct investment (FDI) is a principal channel of technology transfer. Hall and Helmers evaluate the existng literature on the correlaton between intellectual property rights enforcement and foreign direct investment (FDI). They write, “Considering the extensive evidence on FDI serving as a channel for technology transfer, this implies a positve relaton between IPR enforcement and technology transfer through the channel of FDI. However, the literature also points to other important factors in atractng FDI, such as country risk and the availability of low-cost highly-skilled labor” (Hall and Helmers, 2010, p.499). In another study, Park and Lippoldt (2008) examine the relatonship between the strength of intellectual property rights protecton and technology transfer as proxied by inward FDI stocks and imports of goods and services. They analyze a sample of 120 countries over the 1990-2005 period and fnd that strong IP rights induce foreigners to transfer new technologies. The authors also fnd a positve correlaton between the strength of IPRs and the number of patent applicatons by developing countries in additon to R&D expenditure as a share of GDP. They conclude that stronger IP rights are benefcial to domestc development of technology in developing nations.

Beyond FDI as a channel for technology transfer, several private initatves are also in place that facilitate the transfer of environmental innovatons. The Eco-Patent Commons were established in 2008 by IBM, Nokia, Sony and Pitney Bowes, coordinated by the World Business Council for Sustainable Development (WBCSD), and have since been joined by Bosch, DuPont, Xerox, Ricoh, Taisei, Dow Chemical, Fuji-Xerox, Hewlet Packard and Hitachi. Under this initatve frms “pledge” patents to the commons which are then available to third partes without charge, though the patent rights remain with the innovatve frm. According to the Eco-Patent Commons website, the commons were “founded on the commitment that anyone who wants to bring environmental benefts to market can use these patents to protect the environment and enable collaboraton between businesses that foster innovatons. The objectves of the Eco-Patent Commons are: To provide an avenue by which innovatons and solutons may be easily shared to accelerate and facilitate implementaton to protect the environment and perhaps lead to further innovaton; To promote and encourage cooperaton and collaboraton between businesses that pledge patents and potental users to foster further joint innovatons and the advancement and development of solutons that beneft the environment.” (World Business Council) Since the launch in January 2008, more than 100 patents have been pledged by thirteen companies.

Clearly exposure to new technologies is not sufcient for diffusion of the innovaton. In order to bridge the gap between exposure and adopton an economy must possess an appropriate level of absorptve capacity (Png, 2012; Dechezleprêtre, Glachant, Haščič, Johnstone, and Ménière, 2011; World Bank, 2008a, among others). Figure 4 below describes the process, as depicted by the World Bank (2008a). This study creates an index of absorptve capacity, drawing on data on educaton, governance and macroeconomic stability. “Absorptve capacity depends on the overall macroeconomic and governance environment, which influences the willingness of entrepreneurs to take risks on new and new-to-the-market technologies; and the level of basic technological literacy and advanced skills in the populaton, which determines a country’s capacity to undertake the research necessary to understand, implement, and adapt them.” (World Bank, 2008a, p.25) Beyond these elements, the study notes that access to fnancing is also a key component to the absorpton of new technologies.

Figure 3. Domestc absorptve capacity both conditons and atracts external flows
source: World Bank (2008a, p.25).

While absorptve capacity is a necessary conditon, it must be complemented by effectve IP protecton. In a review of the empirical evidence on intellectual property protecton and technology transfer, Hall and Helmers examine the importance of both of these elements.

“[Absorptve capacity] facilitates technology transfer through licensing, which is the channel involving the most disembodied technology transfer external to the multnatonal company ... absorptve capacity is necessary to make use of and learn from imported technology, but [the country is] more likely to receive the technology if the foreign frm from which it comes feels that its ownership rights will be protected. If the absorptve capacity is present but IP protecton is weak foreign frms will tend to establish distributon rather than manufacturing subsidiaries” (Hall and Helmers, 2010, p.12).

In additon, technology transfer is enhanced by openness to trade. Dechezleprêtre, Glachant, Haščič, Johnstone and Ménière (2011) demonstrate that the disseminaton of informaton is more likely if a naton is more engaged in internatonal trade. However, they also show that technology transfer is less likely to occur if the naton is already pursuing similar projects domestcally.

While the majority of evidence on absorptve capacity focuses on the role it plays in facilitatng technology transfer, there is limited evidence that greater absorptve capacity also enhances innovaton. Admitedly, for most developing natons the focus is on atractng technology transfer or facilitatng adaptve R&D rather than innovaton. As noted by Popp (2012) and others, the knowledge spillovers generated by technology transfers are very important. “For technology transfer, policy must manage a careful balancing act, so as to promote knowledge spillovers from technology transfer to the extent possible without discouraging investors from coming into the country at all.” (Popp, 2012, p.34) Dechezleprêtre, Glachant, Haščič, Johnstone and Ménière (2011) fnd that countries with greater technological capacity are more equipped to develop their own innovatons. This is partcularly true in developing natons which also beneft from the reduced need for technology transfer from abroad (Popp, 2012). In a study of technology transfer to developing natons, Haščič and Johnstone use data from patent applicatons and fnd that increases in absorptve capacity increase wind energy patent applicatons fled in developing natons by developed country innovators (Haščič and Johnstone 2011). They go on to demonstrate that absorptve capacity is more important than traditonal technology transfer policies, as well as the Clean Development Mechanism (CDM), a fnding that has been shown in numerous other studies (World Bank, 2008a; Png, 2012; Dechezleprêtre, Glachant, Haščič, Johnstone, and Ménière, 2011, among others).

In their current form, the legal obligatons of technology transfer (from developed to developing natons) under the UNFCCC/Kyoto framework are both vague and non-binding. Van Hoorebeek and Onzivu (2010) describe the Clean Development Mechanism (CDM) of the Kyoto Protocol not as a mechanism for technology transfer, but rather as a mechanism to facilitate investng in sustainable development projects for Certfed Emission Reducton Credits (CER) in developing countries. While frms have an incentve to engage in the CDM since it is frequently less costly to achieve required emission reductons in developing countries, the benefts are more far-reaching. Costa, Doranova and Eenhoorn (2008) present case study evidence from Dutch waste management frms which shows that even frms exempt from emission limits pursue CDM projects.

In a deeper exploraton of the benefts of the CDM, Dechezleprêtre, Glachant, and Ménière (2008) consider whether projects transfer ‘hardware’ (equipment and machinery) or ‘sofware’ (knowledge, skills and know-how). The study includes 644 CDM projects registered with the Executve Board of the UNFCCC, with 279 projects (43%) involving technology transfer. Most of the projects transfer knowledge (101) or knowledge and equipment (121), as opposed to just equipment (57). Larger projects and those involving a subsidiary of a developed country company are more likely to involve technology transfers. While the great majority of projects (73%) are concentrated in four countries, Brazil, China, India and Mexico, there is signifcant variety in the types of projects across countries. Notably 59% of projects in China involve the transfer of technology, while a mere 12% of Indian projects do. In a more recent study, Seres, Haites and Murphy (2009) consider 3296 registered and proposed CDM projects. While they fnd that fewer projects (36%) involve some technology transfer, their results do confrm that technology transfer is more common for larger projects. It is encouraging that this is a marked increase from earlier studies that found approximately one third of projects transferred technology (de Coninck, Haake and van der Linden, 2007). Although Seres et al. also confrm that the rate of technology transfer has always been signifcantly lower in India; their fndings indicate that the rate of technology transfer has decreased appreciably for Brazil and India. To account for this they note that “more projects of a given type in a host country tend to lower the rate of technology transfer for future projects, indicatng the development of a broader technological capacity in the country.” (Seres et al., 2009, p.4926) Again this result provides an encouraging contrast to an earlier study that found that less than 1% of CDM projects were likely to contribute signifcantly to sustainable development in the host country (Suter and Parreno, 2007). Clearly there are marked differences in the technology that is transferred and the opportunites for developing natons to utlize the knowledge and skills to make additonal improvements and further lower their emission levels.

While adaptve research and development (R&D) is an essental component of environmental innovaton by developing natons, they have not yet made adequate progress in this area. Adaptve innovaton is essental to fnding appropriate technologies for local conditons. Consider the following examples, highlighted in Popp (2012). Wang (2010) recounts the Chinese policy of evaluatng potental CDM projects with an eye on local conditons. The government does not embrace technologies that are new to Chinese conditons since the risk of poor adaptaton to local conditons would increase the risk to the CDM credits, lowering their value. In a similar vein, given slower prevailing wind speeds in India relatve to Europe, wind turbines must be adapted to generate electricity (Kristnsson and Rao, 2007). Finally, de la Tour, Glachant and Ménière (2011) fnd that photovoltaic manufacturers in China adapt producton processes, replacing costly capital with less expensive labor.

The World Bank 2010 World Development Report notes that while it is more cost-effectve to adopt technologies from abroad rather than to reinvent them, there are some circumstances in which no internatonal technological soluton exists for a local problem. As an example, the report cites crops and growing methods that may need to be adapted to local climate, drought, soil and technological conditons. Popp (2012) describes the importance of adaptve innovaton, in the context of both local and global benefts as well as immediate and eventual challenges.

Luo, Lovely and Popp (2013) study the patentng history of 806 Chinese solar photovoltaic frms between 1998 and 2008, fnding that frms whose leaders have internatonal experience are more likely to patent. In additon, patentng actvity also increases for neighboring frms who reap spillover benefts from the intellectual returnees. Given this success, it is not surprising that recruitng high-skill returnees is a strategic imperatve for China, emphasized in three natonal middle- and long-term plans. The authors note that China’s policies now not only provide incentves for the return of émigrés, but also include imperatves for overseas experiences in some sectors. While recruitng intellectual returnees has brought clear benefts to China, the authors recommend cauton. They describe the potental for trade conflicts as emerging economies enter high-tech sectors previously dominated by developed natons. In additon, a “fnal cauton relates to the fne line between technology transfer and intellectual property espionage ... as more scientsts return home with human capital acquired in technologically advanced economies, challenges grow for resoluton of intellectual property conflicts within a weal global IP protecton architecture.” (Luo, Lovely and Popp, 2013, pp.27-28)

These fndings are echoed in numerous other studies. The 2010 World Bank World Development report states, there “is no evidence that overly restrictve IPRs have been a big barrier to transferring renewable energy producton capacity to middle-income countries ... . In low-income countries, weak IPRs do not appear to be a barrier to deploying sophistcated climate-smart technologies.” (World Bank, 2008a, p.310) Barpujari and Nanda analyze the IPR regimes of fve Asian natons at differing stages of economic development: China, India, Indonesia, Malaysia and Thailand. Following an assessment of the IPR environment in each naton, based on TRIPS-compatbility, enforcement and TRIPS-Plus provisions, the authors fnd that “the contenton that weak IPRs in developing countries consttute the biggest barrier to technology transfer seems to be untenable.” (Barpujari and Nanda, 2012, p.23) They do, however, acknowledge that developing natons need to make additonal progress in enforcement and building administratve capabilites, though this is dependent upon securing the necessary fnancial and human resources.

Extending these conclusions, a recent study by the UK think tank Chatham House suggests that weak intellectual property rights are a barrier to technological diffusion. They conclude that intellectual property protecton is a factor in the speed of diffusion. Specifcally, many innovators are established industrial giants, and their percepton of the strength of intellectual property protecton in developing countries determines the speed of disseminaton to the extent that it can be expected that weak intellectual property protecton would slow the rate of technology transfer to some developing countries. The study notes that this is dependent on the willingness of such frms “to license for producton or sale [and therefore] may depend on their confdence that they can do so without losing control.” (Lee, Lliev and Preston, 2009, p.21) Perez Pagatch (2011) notes that this is confrmed by leading frms, which “cite weak intellectual property protecton in host countries among the reasons for withholding their latest technologies from certain markets.” (Perez Pagatch, 2011, p.9) Further confrmaton comes from Awokuse and Yin (2010) who study the relatonship between imports and IPR protecton in China, utlizing panel data for 1991-2004. They fnd that China’s imports increase with stronger patent protecton and that this effect is most dominant for hightech industries.

Taking the longer view, it is critcal to assist developing natons in building their own productve and technological capacity in the environmental goods sector. Jha (2009) discusses the importance of access to fnance, venture capital and supportve policies by the government such as renewable energy regulatons, feed-in tariffs and concessionary loans. Each of these is essental for market creaton in renewable energy within developing natons. Although a number of industrialized natons, as well as China and South Korea, provide fnancial support through green fscal stmulus packages, smaller developing countries may not have access to such resources. As described by Sugathan, these circumstances strengthen “the case for bilateral and multlateral support for these developing countries, including as part of a package within the UNFCCC. The World Bank report calls for smarter trade as an adjunct to freer trade, and proposes bundling trade liberalizaton with a package of technical and fnancial assistance.” (Sugathan, 2009, p.7)

In stark contrast to the policies that incentvize and encourage innovaton, the presence of tariffs and nontariff barriers greatly inhibits the development, adopton and use of environmental technology. In a study of 18 developing countries that emit high levels of greenhouse gases, the World Bank (2010) concludes that the eliminaton of tariff and nontariff barriers on clean technologies (they specify: cleaner coal, wind power, solar photovoltaics, and energy-efcient lightng) could increase their traded volume by 14%. The authors argue that trade barriers on imports raises domestc prices, making energy efcient technologies less compettve and cost-ineffectve. Consider the following examples: In Egypt, tariffs on photovoltaic panels average 32%, which is ten tmes the tariff they are subject to in high-income OECD member countries. In Nigeria, photovoltaic panels face tariffs of 20% and nontariff barriers of 70%. Due to tariffs on biofuels in Brazil and subsidies to biofuel producers by OECD countries, investments are not being made in biofuels in Brazil, the world’s most efcient and least-cost ethanol producer. Brazilian ethanol producton grew a modest 6% between 2004 and 2005. By comparison, the United States and Germany increased producton by 20 and 60% respectvely, protectng their producers with tariffs of 25% in the U.S. and more than 50% in the E.U. Relying on market forces and removing the tariffs, nontariff barriers and subsidies should reallocate producton to the most efcient biofuel producers, allowing for increases in producton and more compettve pricing.

CONCLUSIONS

It is important to be aware of the lessons learned about innovaton and the development and disseminaton of technologies: innovaton responds quickly to incentves; innovaton in a given feld experiences diminishing returns over tme; the social returns to environmental research are high while the private returns may not be; and the type of policy used affects the nature, adopton and disseminaton of innovatons. For its part, technology development, diffusion and disseminaton are best encouraged with market forces and incentves. However, in the case of environmental technologies, the presence of dual externalites inhibits the innovatve process. Without effectve public policy markets alone are not likely to provide sufcient incentves for the development of environmental innovatons. Innovatve industries would beneft from greater predictability in each of these areas. As described in the earlier studies, “in this context it is essental for policymakers to fnd a balance: encouraging competton while guaranteeing a large market for minimum economic scale, reducing uncertainty about future resource prices while keeping alternatves open, offering rights of exclusion to intellectual property holders while not curtailing the ability of sequental innovators to build upon past successes, promotng social goals while respectng market pressures.” (Johnson and Lybecker, 2009a, p.5) This contnues to be true, and even more so in developing natons seeking to develop and adopt clean technologies.

Key fndings from this review of recent literature on environmental innovaton:

  • Environmental innovaton is characterized by dual externalites and private underinvestment in research and development (R&D) due to knowledge spillovers and environmental externalites.
  • In both the development and the diffusion of clean technology, the challenges surrounding uncertainty loom large. From beginning to end clean technology innovaton is characterized by uncertainty: uncertainty about actual costs, uncertainty about the end-product of a research process, uncertainty about the recepton by the market, uncertainty about the ability to appropriate the returns to research while compettors try to produce similar results, uncertainty about current and future policy platorms, uncertainty surrounding the pricing of competng as well as complementary goods, and uncertainty about regulatory impacts on the research process and end-result. This is exacerbated by the uncertainty surrounding the rate of innovaton itself which complicates any estmate of global climate change, making it difcult to substantate the reasons for further research funding.
  • While diffusion and adopton are paramount to the ultmate usefulness of a new technology, litle scholarship has focused specifcally on the internatonal transfer of environmental innovatons. Moreover, even within the work on internatonal technology transfer, the majority of work has been done on highly developed economies.
  • In this sector, developing natons fall into two groups: emerging economies, primarily Brazil, China, India and Mexico, are developing environmental technologies while a large group of less-developed countries are not.
  • In the case of developing natons in general, studies fnd a positve correlaton between the strength of intellectual property rights (IPRs) and the domestc development of environmental innovatons. Domestc development increases the likelihood that environmental innovatons are appropriate for local conditons and that existng technologies can be successfully adapted to suit local environmental challenges. To ensure such technologies evolve, domestc innovaton should be supported by strong IPRs.
  • Although the value of patents, and other forms of protecton, varies across countries, across industries and across innovatons, numerous studies have documented the reasons to encourage strong patent law. A majority of economists agree that strong intellectual property rights are an essental prerequisite to the development of environmental technologies. Effectve IPR protecton also appears to play a role in enabling foreign direct investment (FDI) and makes a country a more atractve destnaton for such FDI or various types of commercial partnerships and cooperaton.
  • Other factors are highly determinatve as well. This includes the presence of tariffs and non-tariff barriers, which greatly inhibit the development, adopton and use of clean technology; the presence of qualifed individuals, including management with industrialized country training and educatonal backgrounds; environmental regulatons and other regulatory measures; and the size of the (local or regional) market.

The market for environmental technologies, as described above, is characterized by signifcant uncertaintes and risks. These factors complicate the transfer of technologies, partcularly to developing natons. Moreover, in the face of dual externalites, this presents distnct challenges for their adopton of clean technology innovaton. While market forces and market failures shape the environmental technology sector, politcal and cultural forces further complicate every aspect.

As scholars contnue to analyze when, where, why and how clean technology innovatons are developed and adopted, it is essental that government policymakers aim to reduce uncertainty in the market. This contnues to be a feld of increasing future importance, and a rich area for contnued academic study and analysis. Consumers, government policymakers and innovators would all beneft from a greater understanding of the process of technological change in the development, diffusion and fnancing of clean technologies.

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Biographical note

Dr. Kristna M. Lybecker is the Gerald R. Schlessman Professor of Economics and Associate Chair of the Department of Economics and Business at Colorado College in Colorado Springs, CO. She received her Ph.D. in Economics in 2000 from the University of California, Berkeley. Kristna’s research analyzes the difcultes of strengthening intellectual property rights protecton in developing countries, specifcally in the context of the pharmaceutcal and environmental technology industries. Recent publicatons have also addressed alternatves to the existng patent system, the balance between pharmaceutcal patent protecton and access to essental medicines, and the markets for jointly produced goods such as blood and blood products. Kristna has testfed in more than a dozen states on the economics of pharmaceutcal counterfeitng. She has also worked with US Food and Drug Administraton, Reconnaissance Internatonal, PhRMA, the Natonal Peace Foundaton, the OECD, the Fraser Insttute, and the World Bank, on issues of innovaton, internatonal trade, and corrupton.