Stimulating ‘green’ technological innovation: An analysis of alternative policy mechanisms

As our understanding of human impacts on the environment has increased, it has become clear that we need to move toward a closed-loop industrial society in order to avoid undesirable health and ecosystem consequences. Achievement of this goal depends on radical technological innovation in both products and processes. This paper explores how to design public policy mechanisms to stimulate rather than impede pollution-preventing technological innovation. It begins with a discussion of the role of government in civilian technology development and diffusion. It then sets out six design criteria for policy to promote ‘green’ technology innovation. Based on this set of design criteria, the article assesses the potential and limitations of current U.S. policy approaches to stimulate technological innovation that moves us toward a minimal waste society. The main conclusions of this assessment are as follows. Over the past decade, the U.S. environmental policy system has experienced a variety of reforms and new initiatives, many aimed directly at promoting environmentally-friendly technological change. The strengths of these reforms are to increase the information that the private sector has about the magnitude and cost of their environmental impacts and to allow greater flexibility in the technologies that firms choose to meet environmental regulations and goals. Because of these reforms, firms are likely to undertake technological innovation for the environment in situations with clear short-term economic benefits, i.e. to capture the much heralded win-win potential of environmental regulation. However, these reforms have significant weaknesses as well. Unless policy provides stronger political or economic incentives and clearer signals about future environmental performance requirements, we are unlikely to be able to drive technological innovation in industries where the pay-off is more longterm or uncertain, and thus will make only limited progress toward the goal of a minimal waste society.