Innovation plays a pivotal role in driving the transition towards a low-carbon economy. Without a significant acceleration in green innovation and green technology adoption, reaching net zero emissions by 2050 remains unattainable. The OECD is investigating the implications of green technology innovation and exploring how public policies can help to incentivise firms that innovate in low-carbon technologies. For example, the OECD's analysis of the automotive sector suggests that firms investing early in green innovation – in the context of cleaner vehicles – can reap economic returns if fuel prices are high and salient.
Economic and environmental outcomes of innovation
Innovation is key to improving economic productivity. In particular, green innovation can help countries reach environmental goals by improving material productivity, reducing pollution and mitigating climate change. Currently the impact of green innovation on economic outcomes like firms’ competitiveness is unclear. The OECD fills this gap by investigating the relationship among green innovation, environmental performance and economic performance.
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Key messages
OECD work combining firm- and sector-level data, covering 19 countries over the period from 1990 to 2015, shows that climate policies are effective at inducing innovation in low-carbon technologies in regulated sectors. However, climate policies do not seem to induce significant low-carbon innovation in the other parts of the supply chain across regulated sectors. OECD analysis shows that climate policies have not majorly impacted firms’ competitiveness, and that clean innovation may enable firms to compensate in the short run, for the potential costs implied by new environmental regulations.
The OECD investigates how changes in environmental policy stringency affect productivity growth at the economy, industry and firm level. At the aggregate economy level, environmental policy stringency does not significantly impact productivity growth. At the industry level, a tightening of environmental policy is associated with a short-term increase in industry-level productivity growth, for the most technologically advanced countries and industries. This effect increases with respect to the current productivity level of industries. At the firm level, the technologically most advanced firms experience productivity growth under tightening of environmental policies, while a third of firms, the less productive ones, experience a slowdown in productivity.
Context
Public policy and ambitious price signals can reward early green innovators
OECD analysis of the car manufacturing industry shows that firms innovating in green technologies like electric cars have higher market share several years later if fuel prices are high enough. This suggests that ambitious carbon pricing policies can not only reduce carbon emissions but also reward early green innovators. This may contribute to a broader uptake of green technologies.
Related publications
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Working paper15 February 2022
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