Drivers of environmental innovation - Vinnova
Drivers of environmental innovation - Vinnova
Drivers of environmental innovation - Vinnova
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<strong>Drivers</strong> <strong>of</strong><br />
<strong>environmental</strong><br />
<strong>innovation</strong><br />
VF 2001:1<br />
REVIEW OF CURRENT KNOWLEDGE
TITLE (english): <strong>Drivers</strong> <strong>of</strong> <strong>environmental</strong><br />
<strong>innovation</strong><br />
FÖRFATTARE/AUTHOR:<br />
Nils Markusson<br />
SERIE/SERIES:<br />
VINNOVA Innovation i fokus VF 2001:1<br />
Energimyndigheten ER 2001:1<br />
ISBN 91-89588-01-0<br />
ISSN 1650-3147<br />
PUBLICERINGSDATUM/DATE PUBLISHED:<br />
Februari 2001<br />
UTGIVARE/PUBLISHER: VINNOVA – Verket för<br />
Innovationssystem, Stockholm och<br />
Energimyndigheten<br />
VINNOVAs diarienr NUTEK 1A2-2000-731<br />
REFERAT (syfte, metod, resultat):<br />
Denna rapport är en översikt av befintlig litteratur om hur externa krav driver fram miljö<strong>innovation</strong>er hos<br />
företag. Avsikten är att bidra med kunskap till svenska beslutsfattare. Den akademiska litteraturen har<br />
identifierats via kontakter med forskare samt genom att söka i databaser. Rapporter identifierades genom<br />
publiceringslistor för relevanta svenska och utländska organisationer, samt genom personliga kontakter.<br />
Några av policyslutsatserna är: Både hållbar utveckling och tillväxt kräver ökad samordning mellan<br />
<strong>innovation</strong>spolitiken och miljöpolitiken. Insatser bör rikta sig mot värdekedjor och nätverk, särskilt för att<br />
involvera små och medelstora företag. Man har att välja mellan snabba och stora resultat. Styrmedel bör<br />
samordnas för bästa effekt. Regleringar stimulerar <strong>innovation</strong>er - vad gäller övriga styrmedel vet vi inte,<br />
ännu.<br />
ABSTRACT (aim, method, results):<br />
This study aims to provide an overview <strong>of</strong> the existing literature on how external demands drive<br />
<strong>environmental</strong> <strong>innovation</strong>s within firms. This is done with a view to contribute to the knowledge <strong>of</strong> Swedish<br />
policy makers. The academic literature has been identified through contacts with researchers and<br />
searching databases. Reports were identified through scrutinising the publication lists <strong>of</strong> relevant<br />
Swedish organisations, as well as by utilising personal contacts. Some <strong>of</strong> the policy conclusions are:<br />
Both sustainability and growth require increased cooperation between the areas <strong>of</strong> <strong>innovation</strong> and<br />
<strong>environmental</strong> policy. Policies should target value chains and networks, especially to involve SMEs.<br />
There is a choice to be made between quick results and large results. Policy instruments should be<br />
used in a coordinated manner for best effect. Regulation stimulates <strong>innovation</strong> - apart from that we do not<br />
know, yet.
<strong>Drivers</strong> <strong>of</strong><br />
<strong>environmental</strong><br />
<strong>innovation</strong>
VINNOVA Innovation i fokus VF 2001:1<br />
ISBN 91-89588-01-0<br />
ISSN 1650-3147<br />
Energimyndigheten ER 2001:1<br />
ISSN 1403-1892<br />
Omslagsfoto: Whitney Frank<br />
Tryck: Edhagens grafiska 2001
Preface<br />
Innovations such as new products, processes and organisations, have an<br />
important role to play in the development <strong>of</strong> a sustainable society as well as in<br />
economic growth. Therefore it is important for policy makers to understand the<br />
mechanisms behind <strong>environmental</strong> <strong>innovation</strong>s, and how to enhance the<br />
development <strong>of</strong> <strong>environmental</strong>ly less harmful technology and firm practice.<br />
Firms are stimulated to develop <strong>environmental</strong> <strong>innovation</strong>s both by internal<br />
motivation and competence and by external demands from customers, public<br />
policy, interest groups and other actors. This study is about the role <strong>of</strong> external<br />
<strong>environmental</strong> demands on firms and their effects on <strong>innovation</strong>s in firms. A<br />
special focus is put on the effects <strong>of</strong> <strong>environmental</strong> policy instruments on<br />
<strong>innovation</strong>s. The study provides an overview <strong>of</strong> scientific articles and reports<br />
by public and private organisations.<br />
This report was written by Nils Markusson (project leader), VINNOVA,<br />
Department <strong>of</strong> Innovation Systems, and Annika Ol<strong>of</strong>sdotter, Energi- och<br />
miljöekonomi.<br />
Göran Marklund<br />
VINNOVA, Division <strong>of</strong> Innovation Systems
Content<br />
SAMMANFATTNING................................................................................................... 7<br />
SUMMARY ................................................................................................................... 11<br />
1 INTRODUCTION .................................................................................................. 13<br />
1.1 Aim ................................................................................................................... 13<br />
1.2 Method ............................................................................................................. 13<br />
1.3 What is an <strong>environmental</strong> <strong>innovation</strong>? ............................................................ 14<br />
2 ENVIRONMENTAL INNOVATIONS IN FIRMS ............................................. 17<br />
2.1 Distinguishing features <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s .................................... 17<br />
2.2 Historical developments................................................................................... 17<br />
2.3 Information and knowledge requirements ....................................................... 19<br />
2.4 Organisational <strong>innovation</strong>s ............................................................................. 20<br />
3 EXTERNAL FACTORS THAT DRIVE ENVIRONMENTAL<br />
INNOVATIONS............................................................................................................ 22<br />
3.1 There are limits to the price mechanism as a driving force ............................ 23<br />
3.2 A shift towards market drivers?....................................................................... 24<br />
3.3 Sector and firm size influence response to drivers .......................................... 25<br />
3.4 Inter-firm relations relay and transform <strong>environmental</strong> demands .................. 27<br />
4 ENVIRONMENTAL POLICY INSTRUMENTS AS DRIVERS ...................... 29<br />
4.1 Types <strong>of</strong> policy instruments used ..................................................................... 29<br />
4.2 Regulatory instruments .................................................................................... 30<br />
4.3 Economic instruments...................................................................................... 34<br />
4.4 Communicative instruments............................................................................. 40<br />
4.5 Summary and comments .................................................................................. 44<br />
5 CONCLUSIONS ..................................................................................................... 46<br />
5.1 Conclusions on drivers <strong>of</strong> <strong>environmental</strong> inovations ...................................... 46<br />
5.2 Policy conclusions ........................................................................................... 47<br />
5.3 Areas for further studies .................................................................................. 48<br />
REFERENCES.............................................................................................................. 50<br />
APPENDIX 1 THEORETICAL APPROACHES TO INNOVATIONS..................................... 54<br />
APPENDIX 2 ENVIRONMENTAL POLICY AND COMPETITIVENESS .............................. 58
Sammanfattning<br />
Denna rapport är en översikt av befintlig litteratur om hur externa krav driver<br />
fram miljö<strong>innovation</strong>er hos företag. Avsikten är att bidra med kunskap till<br />
svenska beslutsfattare. Innovationer har en stor potential att bidra till att göra<br />
samhället uthålligt. Krav på företag för en uthållig utveckling är en drivande<br />
kraft för innovativitet i företag, och politiska initiativ kan, utifrån denna<br />
drivkraft, bidra till att stärka företagens utveckling och möjlighet att vara<br />
innovativa.<br />
Miljö<strong>innovation</strong>er kan definieras som ”<strong>innovation</strong>er som tjänar att förebygga<br />
eller minska antropogena bördor på miljön, hantera redan skedda skador eller<br />
diagnostisera och övervaka miljöproblem”. Miljö<strong>innovation</strong>er innefattar många<br />
kunskapsområden och många industriella sektorer och är därför <strong>of</strong>ta komplexa<br />
och påverkar stora delar av näringslivet.<br />
Kapitel 2 beskriver hur miljö<strong>innovation</strong>er tas fram i företag, och behandlar de<br />
särskilda utmaningar miljöinnovativa företag ställs inför. Den historiska<br />
utvecklingen av företagens miljöarbete presenteras. Miljöarbetet har övergått<br />
från att fokusera på hantering av utsläpp, till att finna lösningar på problemen<br />
vid dess källa i produktionen och till ett livscykelperspektiv på produkterna.<br />
Övergången orsakades bland annat av mer omfattande och striktare<br />
lagstiftning, samt av den ökade uppmärksamheten på diffusa miljöproblem.<br />
Det behövs ett bredare urval av kompetenser för miljö<strong>innovation</strong>er än för andra<br />
typer av <strong>innovation</strong>er, och de kräver mer organisationsförändringar. Kunder<br />
och leverantörer är informationskällor som används i miljö<strong>innovation</strong>sprocesser,<br />
men även universitet och högskolor kan vara viktiga källor.<br />
Kapitel 3 fokuserar på de olika externa faktorer som driver fram miljö<strong>innovation</strong>er<br />
i företag. De viktigaste drivkrafterna är <strong>of</strong>fentliga krav och<br />
marknadsrelaterade drivkrafter, såsom konkurrens och viljan att nå ökade<br />
marknadsandelar. Marknadsrelaterade drivkrafter har på senare år stärkt sin<br />
ställning som drivkraft, men <strong>of</strong>fentliga krav är dock fortfarande viktiga.<br />
Vissa sektorer är mer beroende av miljö<strong>innovation</strong>er än andra, exempelvis<br />
kemiindustrin. Variationer mellan sektorer kan helt enkelt vara resultatet av<br />
skilda externa krav. Det kan även bero på att sektorer reagerar olika på<br />
likadana externa krav. Mogna sektorer tenderar att stå emot radikala<br />
förändringar, men kan å andra sidan vara öppna för åtgärder som leder till<br />
ökad effektivisering. Generellt sett tycks större företag ägna sig mer åt miljö<strong>innovation</strong>er<br />
än mindre företag. Stora företag stimuleras av både interna och<br />
externa drivkrafter, medan små företag överlag framför allt reagerar på externa<br />
faktorer, såsom lagar.<br />
7
Konsumtionsvaruföretag och stora företag ställer idag <strong>of</strong>ta miljörelaterade krav<br />
på sina leverantörer, och på så sätt sprids miljökrav från konsumenterna och<br />
från staten till leverantörsföretagen. Detta kan vara en stark drivkraft för<br />
miljöarbete, speciellt i mindre företag. En kombination av regelverk och<br />
miljöengagemang inom hela värdekedjan, från råvaruleverantörer till<br />
producenter, distributörer, konsumenter och avfallsaktörer, behövs för att<br />
initiera miljö<strong>innovation</strong>er.<br />
Kapitel 4 behandlar olika miljöpolitiska styrmedel och vad som är känt om<br />
deras effekter på innovativiteten. Tre huvudsakliga kategorier kan urskiljas:<br />
administrativa, ekonomiska och kommunikativa styrmedel. Administrativa<br />
styrmedel kan beskrivas som institutionella åtgärder med syfte att direkt<br />
påverka miljöarbetet i företag. Administrativa styrmedel inkluderar lagar och<br />
förordningar som beskriver mål, standarder och tekniker. Ekonomiska<br />
styrmedel innefattar beskattning, subventioner och handel med<br />
utsläppsrättigheter. Kommunikativa styrmedel är icke-tvingande styrmedel där<br />
staten på andra sätt utövar påtryckning eller stimulans till miljömedvetenhet<br />
och miljöansvar. Utbildning, information, frivilliga överenskommelser och<br />
nätverksskapande insatser ingår i denna kategori. Kommunikativa styrmedel<br />
används <strong>of</strong>ta tillsammans med administrativa och ekonomiska styrmedel.<br />
Det finns inget enkelt svar på vilken typ av styrmedel som är mer fördelaktigt<br />
än andra, vad gäller effekter på innovativiteten. Olika styrmedel verkar<br />
stimulera olika typer av <strong>innovation</strong>er. Det finns få empiriska resultat och det är<br />
svårt att säga något säkert om vilka effekter de olika miljöpolitiska styrmedlen<br />
har på innovativiteten. De empiriska resultat som finns indikerar att de flesta<br />
styrmedel endast har haft begränsade effekter på innovativiteten. Hårda<br />
regleringar som inte går att möta med dagens teknik har en stor potential att<br />
stimulera radikala <strong>innovation</strong>er, men kan samtidigt orsaka höga kostnader i<br />
företagen.<br />
Slutsatser<br />
Innovationer kan bidra till en hållbar utveckling. Med det som mål finns det<br />
utrymme för att utveckla miljöpolitiken, såväl som den miljömotiverade<br />
<strong>innovation</strong>spolitiken:<br />
• Både hållbar utveckling och tillväxt kräver ökad samordning mellan<br />
<strong>innovation</strong>spolitiken och miljöpolitiken<br />
Miljöpolitiska styrmedel är sällan utformade för att driva fram <strong>innovation</strong>er.<br />
Mer uppmärksamhet på <strong>innovation</strong>sfrågor och vidareutveckling av de<br />
miljöpolitiska styrmedlen kan öka miljöpolitikens möjligheter att lösa<br />
miljöproblemen. Till exempel behövs hårdare, men samtidigt mer flexibla,<br />
regleringar.<br />
8
Övergången mot ett mer marknadsdrivet miljöarbete i näringslivet medför att<br />
miljöaspekten blir allt viktigare för tillväxt och förnyelse. Miljöfrågor bör få<br />
större utrymme inom <strong>innovation</strong>spolitiken.<br />
• Insatser bör rikta sig mot värdekedjor och nätverk, särskilt för att involvera små och<br />
medelstora företag<br />
Företag förmedlar miljökrav till sina leverantörer, men kraven översätts och<br />
omformas på vägen. Inte alla miljömedvetna företag har kommit igång med att<br />
ställa miljökrav på sina leverantörer. Detta kan medföra att underleverantörsföretag<br />
inte alltid upplever några miljökrav från sina kunder, även om<br />
miljöfrågorna är strategiskt viktiga. Därför är det viktigt att använda sig av<br />
styrmedel som riktar sig mot hela värdekedjor och nätverk, snarare än enskilda<br />
företag.<br />
• Man har att välja mellan snabba och stora resultat<br />
Ökade investeringar i redan tillgänglig teknik kan göras snabbare än<br />
framtagande av ny teknik, vilket kräver utvecklingsarbete och ibland till och<br />
med långsiktig forskning.<br />
När nya styrmedel ska utformas är det viktigt att tänka på tidsaspekten.<br />
Utveckling av ny teknik och nya produkter tar tid, och det kan vara en fördel<br />
att ge företag respit med att leva upp till miljökrav för att inte avskräcka dem<br />
från att utveckla <strong>innovation</strong>er.<br />
• Styrmedel bör samordnas för bästa effekt<br />
Eftersom det inte finns något enskilt styrmedel som alltid är bäst, eftersom olika<br />
styrmedel har olika styrkor och svagheter, och eftersom styrmedel påverkar<br />
varandra bör politiker och tjänstemän ge stor uppmärksamhet åt de problem<br />
och möjligheter som finns i samtidig och koordinerad användning av mer än ett<br />
styrmedel.<br />
• Regleringar stimulerar <strong>innovation</strong>er. Vad gäller övriga styrmedel vet vi inte, ännu.<br />
Vi vet idag att regleringar kan stimulera till och med radikala <strong>innovation</strong>er. I<br />
fall där dagens teknik inte räcker, men där ny teknik kan utvecklas för en rimlig<br />
kostand och inom rimlig tid kan regleringar stimulera <strong>innovation</strong>er.<br />
Regleringar kan dock orsaka stora kostnader i företagenn. Det är också viktigt<br />
att ta hänsyn till den internationella konkurrensen vid införande av regleringar.<br />
Utöver regleringar finns det alltför lite kunskap om olika styrmedels effekter på<br />
<strong>innovation</strong>er. Det är också svårt att säga vilka styrmedel som har vilken effekt<br />
på innovativiteten. Mer kunskap behövs. Ett viktigt sätt att få reda på vad som<br />
9
fungerar är att experimentera, och använda många olika styrmedel.<br />
Utvärderingar bör ta upp effekter på <strong>innovation</strong>er.<br />
Ännu så länge finns många brister i utbudet av litteratur och undersökningar<br />
vad gäller olika styrmedel och deras effekt på miljö<strong>innovation</strong>er. Det finns ett<br />
stort behov av fler empiriska resultat på området. Viktiga teman är<br />
miljökommunikation mellan företag, kompetensfrågor, implicita miljökrav på<br />
företag, system<strong>innovation</strong>er och olika styrmedels effekter på <strong>innovation</strong>er.<br />
10
Summary<br />
This study aims to provide an overview <strong>of</strong> the existing literature on how<br />
external demands drive <strong>environmental</strong> <strong>innovation</strong>s within firms. This is done<br />
with a view to contribute to the knowledge <strong>of</strong> Swedish policy makers.<br />
Innovations hold a large potential to contribute to the greening <strong>of</strong> society. Firmexternal<br />
demands for sustainable development is a driving force <strong>of</strong> <strong>innovation</strong><br />
within firms, and public policy may contribute to strengthing firm growth and<br />
capability to innovate based on this driving force.<br />
Environmental <strong>innovation</strong> can be defined as ”<strong>innovation</strong> that serves to prevent<br />
or reduce anthropogenic burdens on the environment, clean up damage already<br />
caused or diagnose and monitor <strong>environmental</strong> problems”. Environmental<br />
<strong>innovation</strong>s involve many areas <strong>of</strong> knowledge and many industrial sectors and<br />
may therefore be systemic and complex.<br />
Chapter 2 describes more specifically the nature <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s,<br />
and includes the specific challenges imposed on firms engaged in<br />
<strong>environmental</strong> <strong>innovation</strong> efforts. The historical development <strong>of</strong> <strong>environmental</strong><br />
work is presented, with the shift from end-<strong>of</strong>-pipe solutions to more integrated<br />
solutions to <strong>environmental</strong> problems being outlined. The shift is due partly to<br />
more comprehensive and stricter legislation, as well as to the increased<br />
attention being paid to more diffuse <strong>environmental</strong> problems.<br />
It appears that a broader range <strong>of</strong> competences is needed for <strong>environmental</strong><br />
<strong>innovation</strong>s than for other types <strong>of</strong> <strong>innovation</strong>s, and that they require more<br />
organisational changes. Customers and suppliers are sources <strong>of</strong> information<br />
used in <strong>environmental</strong> <strong>innovation</strong> processes, but the public knowledge<br />
infrastructure, for example universities and technical colleges, may also be<br />
important.<br />
In chapter 3 the focus is on the different external factors that drive<br />
<strong>environmental</strong> <strong>innovation</strong> activities in firms. The most important drivers are<br />
regulations and market related drivers, such as competition and the hope <strong>of</strong><br />
increased market shares.A shift is taking place away from regulation as the<br />
main driving force as market drivers become increasingly important.<br />
Government demands, however, remain a very important driver <strong>of</strong><br />
<strong>environmental</strong> <strong>innovation</strong>.<br />
Business to business interaction can act to diffuse <strong>environmental</strong> demands from<br />
consumers good firms and large firms to other firms. This can potentially be a<br />
powerful driver <strong>of</strong> <strong>environmental</strong> work, especially in small firms. The<br />
combined action <strong>of</strong> regulation and social concern within the entire value chain,<br />
from raw material suppliers to intermediate manufacturers, final producers,<br />
11
distribution, final customers and disposal chain, is needed to trigger green<br />
<strong>innovation</strong>.<br />
Chapter 4 presents the different <strong>environmental</strong> policy instruments and what is<br />
known about their effects on <strong>innovation</strong>. Three principal categories are<br />
discerned: regulatory, economic and communicative instruments. There is no<br />
simple answer to which type <strong>of</strong> instrument is the most advantageous in terms<br />
<strong>of</strong> their effects on <strong>innovation</strong>s. Different instruments seem to drive different<br />
types <strong>of</strong> <strong>innovation</strong>s.The lack <strong>of</strong> empirical results ensures that we can not<br />
comment on the effects on <strong>innovation</strong> <strong>of</strong> the different <strong>environmental</strong> policy<br />
instruments used. The empirical results at hand seem to show that most<br />
instruments have only had limited effects on <strong>innovation</strong>. Technology forcing<br />
standards may hold the largest potential for radical <strong>innovation</strong>s, but at a large<br />
cost to the firms. There are, however, large gaps in the empirical data on many<br />
instruments, and other instruments may be as effective.<br />
Conclusions<br />
Industrial <strong>innovation</strong>s may contribute to shifting society towards sustainable<br />
development. For this to happen there is a need for improved <strong>environmental</strong><br />
policy as well as <strong>environmental</strong>ly motivated <strong>innovation</strong> policy:<br />
• Both sustainability and growth require increased cooperation between the areas <strong>of</strong><br />
<strong>innovation</strong> and <strong>environmental</strong> policy<br />
• Policies should target value chains and networks, especially to involve SMEs 1<br />
• There is a choice to be made between quick results and large results<br />
• Policy instruments should be used in a coordinated manner for best effect<br />
• Regulation stimulates <strong>innovation</strong>. Apart from that we do not know, yet.<br />
1 Small and medium sized enterprises<br />
12
1 Introduction<br />
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RI#D#GHFDGH#RU#OHVV1#+LVWRULF#UDWHV#RI#VWUXFWXUDO#DQG#WHFKQLFDO#FKDQJH#DYHUDJHG<br />
RYHU# D# FHQWXU\# DUH# IDU# IURP# DGHTXDWH# IRU# VWDELOL]LQJ# FOLPDWH.” (Azar and<br />
Dowlatabadi, 1999)<br />
This quote illustrates the importance <strong>of</strong> technological development and<br />
<strong>innovation</strong>s in societies striving towards sustainability. Existing technology<br />
must be diffused, but there is also a need for new technology. The required rate<br />
<strong>of</strong> technical change – <strong>of</strong> <strong>innovation</strong> - is high and this motivates studying what<br />
drives such change, and to understand what governments can do to support it.<br />
1.1 Aim<br />
The aim <strong>of</strong> this study is to survey the existing literature on how external<br />
demands drive <strong>environmental</strong> <strong>innovation</strong> in firms, and to provide an overview<br />
<strong>of</strong> the field. The material used includes academic articles, scientific papers and<br />
reports from public and private organisations.<br />
The study has been undertaken with a view <strong>of</strong> contributing to the work <strong>of</strong><br />
Swedish policy makers. This is achieved through providing knowledge on what<br />
role the external demands for sustainable development has as a driving force<br />
for <strong>innovation</strong>s in firms, and on how public policy can strengthen firm growth<br />
and <strong>innovation</strong> capability.<br />
1.2 Method<br />
The academic literature has been identified through contacts with researchers<br />
and searching various databases 2 . In a second round articles were identified by<br />
following up on references. The reports were identified through scrutinising the<br />
publication lists <strong>of</strong> relevant Swedish organisations 3 , as well as by utilising<br />
personal contacts. The articles and the reports were summarised and then<br />
organised into the present report structure.<br />
2 Environmental abstracts, LIBRIS, EconLit, Compendex and DADS.<br />
3 OECD, NUTEK (Swedish National Board for Industrial and Technical Development), IVA (Royal<br />
Swedish Academy <strong>of</strong> Engineering Sciences) and Miljöteknikdelegationen (The Swedish Delegation for<br />
Sustainable Technology).<br />
13
It can be observed that the material on <strong>environmental</strong> drivers <strong>of</strong> <strong>innovation</strong>s is<br />
limited. This study, therefore, covers much <strong>of</strong> the existing literature.<br />
The identified material shows a strong bias towards policy instruments, rather<br />
than market related and other drivers, and their effects on <strong>environmental</strong><br />
<strong>innovation</strong>. An explanation for this may be that the market as an important<br />
driver <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong> is a relatively new phenomenon and has as<br />
yet not received much attention by researchers.<br />
1.3 What is an <strong>environmental</strong> <strong>innovation</strong>?<br />
Innovation can be defined in many ways. A definition commonly referred to is<br />
that <strong>of</strong> Schumpeter: “the commercial or industrial application <strong>of</strong> something new<br />
– a new product, process or method <strong>of</strong> production; a new market or source <strong>of</strong><br />
supply; a new form <strong>of</strong> commercial, business or financial organisation”<br />
(Schumpeter, 1934). New is usually interpreted as new to the economy, and not<br />
just new to a single firm. The diffusion <strong>of</strong> technology already on the market is<br />
thus not included within <strong>innovation</strong>. Most <strong>of</strong> the literature identified in this<br />
study is focussed on product and process <strong>innovation</strong>s, and to a lesser extent on<br />
organisational <strong>innovation</strong>s.<br />
Environmental <strong>innovation</strong>s could in principle be defined in two ways: firstly by<br />
the effects <strong>of</strong> the <strong>innovation</strong> on the environment and, secondly, by the intention<br />
<strong>of</strong> the innovator to reduce the <strong>environmental</strong> impact <strong>of</strong> processes or products.<br />
Innovations that are not driven by a conscious intention to reduce<br />
<strong>environmental</strong> impact may nevertheless have this quality. An example might be<br />
increased fuel efficiency <strong>of</strong> a car arising from the incremental improvement <strong>of</strong><br />
the motor. The prime motivation for such an <strong>innovation</strong> is most likely<br />
performance or price considerations, but the effects on <strong>environmental</strong><br />
performance may anyhow be positive.<br />
Hemmelskamp defines <strong>environmental</strong> <strong>innovation</strong> as an ”<strong>innovation</strong> which<br />
serves to prevent or reduce anthropogenic burdens on the environment, clean<br />
up damage already caused or diagnose and monitor <strong>environmental</strong> problems”<br />
(Hemmelskamp, Forthcoming). Hemmelskamp also differentiates between end<strong>of</strong>-pipe<br />
and integrated <strong>environmental</strong> technologies, where end-<strong>of</strong>-pipe<br />
technologies are by their very nature incremental process <strong>innovation</strong>s<br />
(Hemmelskamp 1997).<br />
Malaman defines a closely related concept, cleaner technologies, as: ”all<br />
modifications in processes and products which reduce impact on the<br />
environment, as compared to the processes and products which they have<br />
substituted” (Malaman, 1996).<br />
Both these definitions appear to focus on the effects <strong>of</strong> <strong>innovation</strong>s rather than<br />
on the intention. A problem with this may be deciding which <strong>innovation</strong>s in<br />
practise actually reduce the <strong>environmental</strong> impact <strong>of</strong> products and production.<br />
14
But there are also problems with a definition that focuses on the intention <strong>of</strong> the<br />
innovators. As industry moves on from end-<strong>of</strong>-pipe solutions to integrated<br />
technologies and product <strong>innovation</strong>s, the <strong>environmental</strong> motivation for the<br />
<strong>innovation</strong> may become entangled with other motivations. It may also be<br />
difficult to establish the relationship between the dedicated <strong>environmental</strong><br />
activities <strong>of</strong> firms and the <strong>environmental</strong> performance <strong>of</strong> industry.<br />
The OECD emphasises the systemic character <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s. In<br />
the past <strong>environmental</strong> technology referred to pollution control or end-<strong>of</strong>-pipe<br />
technologies, but today integrated solutions are more common and all<br />
technologies can be considered <strong>environmental</strong> in cases were they are employed<br />
to reduce <strong>environmental</strong> impact. The use <strong>of</strong> integrated solutions increases the<br />
number <strong>of</strong> areas <strong>of</strong> knowledge and technology that may contribute.<br />
Environmental <strong>innovation</strong>s will also occur in all industries rather than only in<br />
the dedicated <strong>environmental</strong> goods and services sector. Innovations in a wide<br />
range <strong>of</strong> industries have significant <strong>environmental</strong> impacts. Some <strong>innovation</strong>s,<br />
for example information and communication technology <strong>innovation</strong>s induce<br />
structural changes in the economy generating ”unintentional” <strong>environmental</strong><br />
benefits. Both these aspects illustrate that <strong>environmental</strong> <strong>innovation</strong>s may to a<br />
large extent be systemic and complex in that they involve many areas <strong>of</strong><br />
knowledge and many different industrial sectors (OECD, 2000).<br />
One way to address and reduce this complexity is to categorise <strong>environmental</strong><br />
<strong>innovation</strong>s according to differences in their use. Kemp and Malaman list<br />
similar categories <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s:<br />
Kemp<br />
Pollution control technologies<br />
Waste management<br />
Clean technology<br />
Recycling<br />
Clean Products<br />
Clean-up technology<br />
Monitoring and assessments<br />
technologies<br />
(Malaman, 1996; Kemp, 1998).<br />
Malaman<br />
Cleaner products<br />
Input reduction<br />
Input substitution<br />
Energy saving technologies<br />
Cleaner production processes<br />
Recovery and recycling technologies<br />
Cleaner products which modify the<br />
production process <strong>of</strong> other firms<br />
Environmental diagnostics and monitoring<br />
Add-on or end-<strong>of</strong>-pipe technologies<br />
Other researchers stress that all technologies may contribute to <strong>environmental</strong><br />
<strong>innovation</strong>s, but the above lists appear to be both categories <strong>of</strong> use as well as<br />
distinctive technologies. It is unclear if they are selected by their effect on the<br />
environment or by the intention <strong>of</strong> the innovator.<br />
15
Environmental <strong>innovation</strong>s can also be brought about by organisational<br />
changes. Examples <strong>of</strong> such <strong>innovation</strong>s include: firm <strong>environmental</strong> statements,<br />
development <strong>of</strong> <strong>environmental</strong> programmes, introduction <strong>of</strong> <strong>environmental</strong><br />
learning techniques, allotment <strong>of</strong> responsibilities, establishment <strong>of</strong><br />
communications channels and teams, and establishment <strong>of</strong> inter-organisational<br />
networks and partnerships (Kemp, 1998).<br />
See appendix 1 for a more in-depth account <strong>of</strong> theoretical approaches to<br />
<strong>innovation</strong>s.<br />
16
2 Environmental <strong>innovation</strong>s in firms<br />
In this chapter the nature <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s will be further<br />
investigated. Included within the discussion will be the specific challenges<br />
posed on those firms engaged in <strong>environmental</strong> <strong>innovation</strong> efforts.<br />
2.1 Distinguishing features <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s<br />
In addition to their <strong>environmental</strong> qualities, some researchers claim that<br />
<strong>environmental</strong> <strong>innovation</strong>s, in spite <strong>of</strong> their diversity, have some traits in<br />
common that differentiates them from other types <strong>of</strong> <strong>innovation</strong>s. Malaman<br />
(1996) claims that market demand for cleaner technology <strong>innovation</strong>s is<br />
generally slack and difficult to predict. Four reasons for this are provided::<br />
1) The objective <strong>of</strong> cleaner production is lower on the agenda <strong>of</strong> firms than that<br />
<strong>of</strong> pr<strong>of</strong>it.<br />
2) In the introductory stage cleaner technologies may feature higher costs and<br />
inferior quality.<br />
3) Information problems seem to be greater than in other cases, due to the<br />
complexity <strong>of</strong> <strong>environmental</strong> aspects and lack <strong>of</strong> knowledge.<br />
4) Environmental <strong>innovation</strong>s call for more organisational and institutional<br />
changes.<br />
Another distinguishing factor reported is that awareness <strong>of</strong> <strong>environmental</strong><br />
issues may play a role as an additional incentive to those involved in the<br />
<strong>environmental</strong> <strong>innovation</strong> process (OECD, 2000). The importance <strong>of</strong> staff<br />
awareness is also confirmed by an Italian study which shows awareness to be <strong>of</strong><br />
medium importance for <strong>environmental</strong> <strong>innovation</strong>s. Awareness is less<br />
important than regulation and market factors, but more important than, for<br />
example, changes in supply (Malaman, 1996).<br />
The nature <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong> and the conditions in <strong>environmental</strong>ly<br />
innovating firms have, however, changed over time. To understand the<br />
characteristics <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong> today we should first look back in<br />
time.<br />
2.2 Historical developments<br />
The conditions for the <strong>environmental</strong> work <strong>of</strong> firms and for the authorities<br />
dealing with <strong>environmental</strong> issues have changed radically during the last 30<br />
years. In the 1970s <strong>environmental</strong> work was <strong>of</strong>ten aimed at combating acute,<br />
localised pollution. The polluters were identifiable, the uncertainty was low and<br />
urgent action was required. The results were <strong>of</strong>ten end-<strong>of</strong>-pipe-solutions.<br />
17
Since then laws as well as the <strong>environmental</strong> problems have changed. In most<br />
countries legislation has become stricter and more comprehensive.<br />
Environmental problems are nowadays <strong>of</strong>ten diffuse and their scope and effects<br />
are <strong>of</strong>ten controversial. Problems like global warming, ozone depletion and<br />
cross-border water pollution are seldom spotted directly, and represent risks<br />
that must be prevented. The consequences <strong>of</strong> this change are important:<br />
whereas in the past the identification <strong>of</strong> polluters, <strong>of</strong> the Best Available<br />
Technology and <strong>of</strong> costs was quite easy, the <strong>innovation</strong> process is nowadays<br />
more complex (Aggeri, 1999).<br />
The response <strong>of</strong> firms to <strong>environmental</strong> problems has evolved accordingly.<br />
Four historic stages in the development <strong>of</strong> cleaner technologies can be<br />
discerned:<br />
1) first energy shock – early 1970s<br />
Environmental <strong>innovation</strong>s primarily motivated by energy savings.<br />
2) mid 1970s – mid 1980s<br />
Environmental policy developed by Government. Industry responded<br />
passively and adopted end-<strong>of</strong>-pipe technologies.<br />
3) second half <strong>of</strong> the 1980s<br />
Firms adopted a defensive medium-term approach. Innovations usually timed<br />
with systems renovation.<br />
4) end 1980s – present<br />
Environmental objectives included in corporate strategy and <strong>innovation</strong>s are<br />
also aimed at acquiring competitive advantage.<br />
New technologies must be integrated into the broader technical, economic and<br />
social systems. This requires not only a complex <strong>innovation</strong> process but also<br />
new skills, new organisational structures and new regulations. The earliest<br />
cleaner technologies developed were add-on or end-<strong>of</strong>-pipe technologies, which<br />
were relatively easy to develop and employ within existing technological<br />
systems (Malaman, 1996).<br />
Today, a larger share <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s than was hitherto the case<br />
are product rather than process <strong>innovation</strong>s. The level <strong>of</strong> development <strong>of</strong><br />
<strong>innovation</strong>s was classified in the Italian study on a scale from R&D 4 via<br />
prototype and first application to maturity. Product <strong>innovation</strong>s were generally<br />
at a lower level <strong>of</strong> development than process <strong>innovation</strong>s, and it is likely that<br />
the proportion <strong>of</strong> product <strong>innovation</strong>s will further increase (Malaman, 1996).<br />
Some support for the development as presented by Malaman comes from a<br />
WBSCD 5 study. Almost 90 per cent <strong>of</strong> the firms in the study agreed that<br />
4 Research and development<br />
5 World Business Council for Sustainable Development<br />
18
”sustainable development is a key business driver for the firm”. The most<br />
important factors supporting this view were firm image and brand value. Of<br />
medium importance were new product and service advantage, staff values and<br />
principles and cost advantage. Direct demands from regulators, customers and<br />
special interest groups were considered to be the least important. Firm image<br />
and brand value were thus considered much more important than customer or<br />
regulator demands (Dearing, 2000).<br />
2.3 Information and knowledge requirements<br />
As noted above <strong>environmental</strong> <strong>innovation</strong>s are said to encompass more<br />
information problems than other <strong>innovation</strong>s. However, what are the<br />
information and knowledge requirements <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s?<br />
Environmental <strong>innovation</strong>s must not only be <strong>environmental</strong>ly beneficial, but<br />
must also meet a range <strong>of</strong> other demands such as user requirements on<br />
functionality and cost. It should also be possible to produce <strong>environmental</strong><br />
<strong>innovation</strong>s with the existing production processes (Kemp, Forthcoming). A<br />
basic restriction is that development and production will have to be performed<br />
with the knowledge and competence already existing in the firm. Although<br />
new competences can be acquired through learning processes, such processes<br />
are time consuming. This illustrates the path dependency that <strong>environmental</strong><br />
<strong>innovation</strong>s share with other <strong>innovation</strong>s.<br />
Environmental <strong>innovation</strong>s also give rise to special problems. The information<br />
requirement <strong>of</strong> <strong>environmental</strong>ly innovative firms is higher than in other cases.<br />
Firms find it hard to gain an overview <strong>of</strong> the available <strong>environmental</strong><br />
technologies, and to obtain full information on their effect and applicability<br />
(Hemmelskamp, Forthcoming).<br />
A broader range <strong>of</strong> competences is needed for <strong>environmental</strong> <strong>innovation</strong>s than<br />
for other types <strong>of</strong> <strong>innovation</strong>s, and managing this variety <strong>of</strong> competences can be<br />
difficult. The WBSCD has studied how 80 firms with an expressed commitment<br />
to sustainable development and <strong>environmental</strong> protection incorporate their<br />
commitment into <strong>innovation</strong> management. The respondents – <strong>of</strong>ten senior<br />
managers with responsibility for aspects <strong>of</strong> <strong>innovation</strong>, product development<br />
and technology management - generally felt uncertain <strong>of</strong> their ability to manage<br />
and assess the creative skills required to address the broader agenda <strong>of</strong><br />
sustainable development (Dearing, 2000).<br />
What do firms do to meet the information and knowledge needs they face when<br />
engaged in <strong>environmental</strong> <strong>innovation</strong>? Part <strong>of</strong> the solution lies in receiving<br />
information from external sources. Equipment manufacturers play an<br />
important role in the supply <strong>of</strong> information to the suppliers <strong>of</strong> <strong>environmental</strong><br />
<strong>innovation</strong>s. Suppliers <strong>of</strong> materials and components provide important<br />
information for developing <strong>environmental</strong>ly friendly products and reducing<br />
consumption <strong>of</strong> materials. The results <strong>of</strong> a German study indicate that<br />
19
customers do not influence the provision <strong>of</strong> information for <strong>environmental</strong><br />
product <strong>innovation</strong>s. Instead the public infrastructure: universities and<br />
technical colleges, as information providers, exert a strong influence on the<br />
development <strong>of</strong> <strong>environmental</strong>ly friendly products (Hemmelskamp,<br />
Forthcoming).<br />
Another strategy to satisfy information and knowledge needs is internal<br />
learning in the form <strong>of</strong> R&D. However, Hemmelskamp found that the<br />
importance <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong> objectives falls as R&D intensity rises.<br />
A proposed explanation for this is the dominance <strong>of</strong> end-<strong>of</strong>-pipe solutions.<br />
These are essentially incremental improvements to existing technological<br />
solutions and can be bought on the market, with the consequence that R&D is<br />
only required to a limited extent (Hemmelskamp, Forthcoming).<br />
2.4 Organisational <strong>innovation</strong>s<br />
Organisational factors influence the innovative response <strong>of</strong> firms to<br />
<strong>environmental</strong> demands. As stated above by Malaman this is especially true for<br />
<strong>environmental</strong> <strong>innovation</strong>s.<br />
The organisational strategy <strong>of</strong> firms in relation to <strong>environmental</strong> activites has<br />
changed over time. Greoenwegen and Vergragt present a stage-based account<br />
<strong>of</strong> the development <strong>of</strong> organisational <strong>environmental</strong> <strong>innovation</strong>s inside large<br />
industrial corporations:<br />
- 1980 Small <strong>environmental</strong> units, with their activities mainly restricted to<br />
reacts to government regulation, by producing reports based on<br />
scientific research.<br />
1984-88 Increased activity. Education and training for staff in all levels <strong>of</strong> the<br />
organisation.<br />
Late 80s Increased activities in some firms, with <strong>environmental</strong> issues being<br />
viewed in a strategic way. A proactive and preventive course is<br />
followed.<br />
They claim that there has been a trend towards integrating <strong>environmental</strong><br />
concerns into business strategy, and towards more strategic handling <strong>of</strong> these<br />
issues. Growing public concern and the increased geographical scale <strong>of</strong><br />
<strong>environmental</strong> problems drive the trend (Groenewegen and Vergragt, 1991).<br />
A confirmation <strong>of</strong> the interdependence <strong>of</strong> organisational factors and<br />
<strong>environmental</strong> <strong>innovation</strong>s is given by Sanchez and McKinley. They show that<br />
customisation has a positive correlation with product <strong>innovation</strong> response to<br />
<strong>environmental</strong> regulation (Sanchez and McKinley, 1998).<br />
Organisational factors influence innovative behaviour, but <strong>environmental</strong><br />
<strong>innovation</strong>s also influence a firm’s organisation. Green et al studied how firms<br />
change their innovative practices in response to <strong>environmental</strong> pressures. There<br />
20
was in general no larger change in the <strong>innovation</strong> practices. Strategic changes<br />
indicating major new directions in technological development like increased or<br />
reorganised R&D, inflow <strong>of</strong> technical staff with new skills or changed<br />
collaboration patterns received low or average scores. However, in the case <strong>of</strong><br />
major technological change, strategic changes in the <strong>innovation</strong> practices were<br />
made more <strong>of</strong>ten than for minor technological changes (Green et al, 1994).<br />
21
3 External factors that drive <strong>environmental</strong><br />
<strong>innovation</strong>s<br />
In the previous chapter some <strong>of</strong> the characteristics <strong>of</strong> <strong>environmental</strong><br />
<strong>innovation</strong>s were presented. We now turn to the question <strong>of</strong> which external<br />
factors drive <strong>environmental</strong> <strong>innovation</strong> activities in firms.<br />
Many external factors may influence a firm’s <strong>environmental</strong> activities. This is<br />
illustrated by a British study examining both internal and external factors that<br />
prompt <strong>environmental</strong> <strong>innovation</strong>s. In this study regulations and marketrelated<br />
drivers, like competition and the hope for increased market shares, are<br />
found to be the most important drivers. But other external drivers like<br />
insurance firms, new products <strong>of</strong> suppliers, <strong>environmental</strong> campaigns etc have<br />
been found to have some importance in stimulating <strong>environmental</strong> <strong>innovation</strong>s<br />
(Green et al, 1994). The wide array <strong>of</strong> external drivers is confirmed by the<br />
OECD, which lists customers, consumers, media, employees, <strong>environmental</strong><br />
organisations, stockowners and other citizens as external drivers (OECD, 2000).<br />
Either regulation or market-related drivers are reported as the strongest driver<br />
by many researchers.<br />
The price <strong>of</strong> inputs and products will influence a firm’s innovative behaviour.<br />
Firms have an economic interest to restrict their resource use. If it is possible to<br />
produce a certain product with less input <strong>of</strong> resources, while the quality<br />
remains the same, the production process becomes less expensive. Price<br />
changes, or their expectations, can make the incentives stronger or weaker. If<br />
there is a restriction <strong>of</strong> resources then prices will inevitably rise. The usual<br />
notion that firms have a pr<strong>of</strong>it-maximising behaviour is thus a driving force to<br />
technological development.<br />
Future demand and prices are however uncertain and difficult or impossible to<br />
predict. The interest in <strong>environmental</strong> issues and the <strong>environmental</strong> demands<br />
placed by external actors may or may not translate into future willingness to<br />
pay. This situation creates uncertainty to which firms will respond differently.<br />
Some firms see the economic advantages in introducing <strong>environmental</strong>ly sound<br />
products onto the market and are willing to take the risk, while others are more<br />
reluctant to do so.<br />
Governmental <strong>environmental</strong> demands can also provide incentives for<br />
technical development. Governmental authorities use a wide spectre <strong>of</strong><br />
instruments to make firms improve their <strong>environmental</strong> performance. Policy<br />
instruments other than those <strong>of</strong> <strong>environmental</strong> policy may also have an impact<br />
on <strong>environmental</strong> <strong>innovation</strong>s. An example is <strong>innovation</strong> policy support to<br />
R&D, like information technology development projects, which may have<br />
22
positive <strong>environmental</strong> effects although they are not explicitly targeted at<br />
achieving <strong>environmental</strong> goals. Also, the broader range <strong>of</strong> transport,<br />
agricultural, financial politics etc will be important. This study is, however,<br />
restricted to <strong>environmental</strong> policy.<br />
This chapter discusses the drivers <strong>of</strong> <strong>innovation</strong>s without trying to estimate<br />
whether the <strong>innovation</strong>s will contribute to firm competitiveness or not.<br />
Competitiveness is discussed in appendix 2.<br />
3.1 There are limits to the price mechanism as a driving force<br />
Price is an important, but insufficient, mechanism in governing the economic<br />
efficiency as well as the <strong>environmental</strong> innovativeness <strong>of</strong> firms.<br />
To the extent that prices reflect <strong>environmental</strong> costs, the price mechanism<br />
should induce firms to optimise their behaviour and thereby reduce their<br />
<strong>environmental</strong> impact. Historical data show that energy efficiency improves<br />
more dramatically during times <strong>of</strong> economic crisis than during periods <strong>of</strong><br />
growth. These observations are consistent with the belief that high prices on<br />
energy lead to a demand-pull model <strong>of</strong> technological change, triggering<br />
structural change and <strong>innovation</strong>s that can improve the efficiency <strong>of</strong> energy<br />
use. However, in the course <strong>of</strong> studying energy investments Azar and<br />
Dowlatabadi found that energy costs are only one factor influencing corporate<br />
R&D efforts and technological development. To the extent that energy costs are<br />
significant, efforts to improve existing technologies are <strong>of</strong>ten directed to<br />
improve energy efficiency. But, if energy costs are low, then other<br />
characteristics, for example performance, may play a more important role.<br />
Technology clearly has the potential to improve energy efficiency, but energy<br />
costs or efficiency standards have to prominently appear in economic activity<br />
for technological change to deliver improved energy efficiency and reduced<br />
energy intensity (Azar and Dowlatabadi, 1999).<br />
For many energy users, energy is not a dominant cost factor. Industrial energy<br />
users, except for raw materials processes, rarely have energy as a significant<br />
component <strong>of</strong> their operating costs. In households, the costs <strong>of</strong> accumulating<br />
and processing the appropriate information to optimise energy (or indeed any<br />
resource) are too high. Simon 6 coined the term ”satisficing” to describe the<br />
notion that, once a decision-maker satisfies the constraints that are faced, the<br />
extra steps needed to refine this activity and achieve the optimum resource use<br />
are rarely undertaken. The pattern <strong>of</strong> most energy investments is better<br />
explained by satisfying constraints than by optimising investments in<br />
technology and energy consumption (Azar and Dowlatabdi, 1999).<br />
6 Simon HA., 1982, Models <strong>of</strong> bounded rationality, Cambridge, MA: MIT Press, 336 pp<br />
23
3.2 A shift towards market drivers?<br />
The historical account in the previous chapter suggests that firms today more<br />
<strong>of</strong>ten see <strong>environmental</strong> issues as an integrated part <strong>of</strong> their business idea, and<br />
<strong>environmental</strong> <strong>innovation</strong>s as enhancing their competitiveness. This suggests<br />
that market drivers should be more important than before and increasingly<br />
more important than policy. Research results <strong>of</strong>fer some support to this, but<br />
there are also results pointing in other directions as well.<br />
The importance <strong>of</strong> market drivers is shown by a Swedish report based on a<br />
survey <strong>of</strong> 300 manufacturing firms. In 1991 very few <strong>of</strong> the firms stated that<br />
market drivers were important, and that demands emanating from the various<br />
branches <strong>of</strong> government were the dominant driver. Thirteen per cent <strong>of</strong> firms<br />
stated that they did not experience any <strong>environmental</strong> demands whatsoever.<br />
But in 1996, the strongest driver <strong>of</strong> the firms in 36 per cent <strong>of</strong> cases were<br />
customers, in 24 per cent <strong>of</strong> the cases the concern and in 19 per cent <strong>of</strong> the cases<br />
demands from government authorities (Heidenmark, 1999).<br />
Similar results were found in an earlier Swedish study. In 1991, 72 per cent <strong>of</strong><br />
the firms stated that government demand was the prime source <strong>of</strong><br />
<strong>environmental</strong> demands, and 15 per cent that customers were the prime source.<br />
In 1995 the corresponding figures were 38 per cent and 29 per cent. This<br />
illustrates that customers have become a more important driving forces but also<br />
that the sources <strong>of</strong> <strong>environmental</strong> demands has diversified. Other, less<br />
important, sources were owners, employees and public opinion (IVA, 1995).<br />
The shift towards more integrated <strong>environmental</strong> process <strong>innovation</strong>s and<br />
more <strong>environmental</strong> product <strong>innovation</strong>s described in chapter 2, may be related<br />
to the shift towards market drivers. Green et al found that product <strong>innovation</strong>s<br />
are driven more by market drivers than process <strong>innovation</strong>s, whereas cost<br />
savings are more important for process <strong>innovation</strong>s (Green et al, 1994).<br />
Malaman states that <strong>environmental</strong> conservation through cleaner technologies<br />
appears to be an objective integrated into the primary objective <strong>of</strong> balancing the<br />
budget, in contrast to end-<strong>of</strong>-pipe technologies, which always implies costs<br />
(Malaman, 1996).<br />
Older studies, however, indicate government policy as more important than<br />
market drivers. One reason for this conclusion may be that the time period<br />
studied is older. Hemmelskamp refers to such a study <strong>of</strong> the German textile<br />
industry by Maas from 1987, when <strong>environmental</strong> <strong>innovation</strong>s were mainly<br />
implemented because <strong>of</strong> regulative pressure (Hemmelskamp, 1997). But the<br />
difference in results may also be related to differences between countries and<br />
regions. Connell and Flynn present a study published as recently as 1999 (data<br />
from 1996/97), showing that firms in South Wales were driven mainly by<br />
policy demands. Environmental demand pressures are likely to vary between<br />
countries. Another reason is probably that the industrial structure varies<br />
between countries.<br />
24
That location also plays an important role in determining firm response is<br />
confirmed by a WBSCD study. Asian firms were more inclined to see a direct<br />
connection between their commitment to sustainable development and sales.<br />
They were also most likely to believe that sustainable products and services will<br />
provide competitive advantage. Australian firms saw themselves in the early<br />
stages <strong>of</strong> addressing sustainable development. North American firms focused<br />
on cost advantage and were less likely to include <strong>environmental</strong> considerations<br />
as part <strong>of</strong> their published mission. European firms scored average values<br />
(Dearing, 2000).<br />
Other studies report government policy, in particular regulation, as the<br />
strongest driver, but with market drivers as a close second. Green et al found<br />
that regulation got the highest scores for prompting both product and process<br />
<strong>innovation</strong>s, and that there was a significant correlation between the influence<br />
<strong>of</strong> regulation and <strong>of</strong> commercial factors. (Green et al, 1994). Malaman found<br />
that in more than 80 per cent <strong>of</strong> the <strong>innovation</strong>s studied, legislation influence<br />
was medium or high. In more than 60 per cent <strong>of</strong> the cases the <strong>innovation</strong>s were<br />
associated with a desire to increase market shares or enter new markets, and in<br />
almost 80 per cent <strong>of</strong> the cases the relationship with core business was found to<br />
be very strong (Malaman, 1996). These studies were conducted in the UK and<br />
Italy respectively. It may be that the shift has evolved further in Sweden,<br />
explaining the differences between these studies and the Sweden.<br />
These studies show that market today is a strong driving force, but also that<br />
policy remains a strong driver. The shift in emphasis means that the market has<br />
partially replaced and is partially complementary to policy as a driver.<br />
3.3 Sector and firm size influence response to drivers<br />
Some sectors are more dependent on <strong>environmental</strong> <strong>innovation</strong>s than others.<br />
Chemicals and synthetic fibre industries are examples <strong>of</strong> such sectors. Other<br />
<strong>environmental</strong>ly innovative industries are machines and mechanics, electrical<br />
materials and the automotive industry (Malaman, 1996).<br />
Another illustration <strong>of</strong> this is provided by Hemmelskamp. The share <strong>of</strong><br />
<strong>environmental</strong>ly innovative firms varies in his study between sectors:<br />
- food, beverages and tobacco (84 %),<br />
- wood processing, paper, printing and publishing (83 %) and<br />
- refineries, chemicals, rubber and plastics (82 % )<br />
In contrast, those sectors with low rankings were:<br />
- ceramics, chalk and cement (47 %) and<br />
- control engineering and metrology (47 %).<br />
“Environmentally-innovative companies” were in the study defined as those<br />
considering <strong>environmental</strong> related objectives as significant or highly significant<br />
to their innovative activities (Hemmelskamp, Forthcoming).<br />
25
Variation between sectors may simply be the result <strong>of</strong> varying external<br />
demands. A Swedish study compared drivers between industrial sectors.<br />
Industry sectors where customers were more important than authorities as<br />
drivers were construction and real estate. The opposite was true for petroleum<br />
products and metal manufacturing. These conclusions are however based on a<br />
somewhat meagre statistical basis. The result may illustrate the relatively<br />
strong regulatory pressure on petroleum products and metal manufacturing,<br />
and shows that industrial sectors differ with regard to what demands are<br />
placed on them and what drives their <strong>environmental</strong> work (IVA, 1995).<br />
But it may also be the case that sectors react differently to the same external<br />
pressures. Kemp describes a number <strong>of</strong> factors affecting the innovative<br />
behaviour <strong>of</strong> industry in relation to <strong>environmental</strong> regulations. The results<br />
show that although high volume, mature sectors were resistant to change, they<br />
were very amenable to <strong>environmental</strong> monitoring and process controls that<br />
improved efficiency. Two suggested explanations for this are presented: firstly<br />
that rigidity may come with maturity in a sector and, secondly, those powerful<br />
sectors are better at fighting <strong>of</strong>f regulations and imposed change. Smaller firms<br />
and potential new entrants tended to develop more innovative responses. The<br />
<strong>environmental</strong> goods and services industry provided compliance strategies that<br />
were at best incrementally innovative, but which diffused fast, due to their lack<br />
<strong>of</strong> disruption and to their acceptability to regulators (Kemp, Forthcoming).<br />
Plant age may be another determining factor. Sanchez and McKinley indicate<br />
that product <strong>innovation</strong> response to <strong>environmental</strong> regulation increases with<br />
plant age. Young plants appear to be inhibited in generating new products in<br />
response to high <strong>environmental</strong> regulatory impact. A proposed explanation is<br />
that an experienced workforce may respond more flexibly to regulatory<br />
pressure. Another explanation may be more routinised procedures to change<br />
the manufacturing process (Sanchez and McKinley, 1998). Interestingly, this<br />
result seems to contradict Kemp’s argument about mature sectors being<br />
resistant to change.<br />
Firm size is also an important factor in determining firm response. In general<br />
large firms are more prone to <strong>environmental</strong> <strong>innovation</strong>s than small firms. A<br />
study <strong>of</strong> Welsh firms shows that large firms were nearly 50 percent more<br />
motivated to make <strong>environmental</strong> improvements than SMEs. Frequent<br />
responses by SMEs to the questions asked were “we are to small to have any<br />
significant effects”. Nearly 70 per cent <strong>of</strong> firms considered themselves as<br />
harmless to the environment. Large firms were likely to be stimulated by both<br />
external and internal motivators, whereas in general small firms were more<br />
likely to be prompted by just external factors (such as legislation) (Connell and<br />
Flynn, 1999).<br />
A Swedish study categorised the <strong>environmental</strong> work <strong>of</strong> the studied firms into<br />
five categories ranging from <strong>environmental</strong>ly passive to <strong>environmental</strong>ly<br />
26
adapted, with the latter indicating the most proactive, permeating level <strong>of</strong><br />
<strong>environmental</strong> work. Firm size was strongly correlated to the advancement <strong>of</strong><br />
<strong>environmental</strong> activities. The smallest firms (1000 employees) had either adopted a strategy<br />
to optimise their activities in relation to current and future demands from the<br />
market and from authorities, or, as in the majority <strong>of</strong> the cases, had an even<br />
more ambitious strategy. In the latter case the firms could be said to be<br />
proactive and would include a <strong>environmental</strong> dimension in their decision<br />
making and strategy development (Heidenmark, 1999).<br />
However, a partially deviating result is presented by Hemmelskamp.<br />
Environmental <strong>innovation</strong>s were shown in this study to be a priority above all<br />
in very small and very large firms and less so in middle-sized ones. A possible<br />
explanation proposed is that the dedicated <strong>environmental</strong> technology industry<br />
is mainly composed <strong>of</strong> small firms (Hemmelskamp, Forthcoming).<br />
3.4 Inter-firm relations relay and transform <strong>environmental</strong> demands<br />
Firms producing consumer goods have been at the forefront <strong>of</strong> <strong>environmental</strong><br />
work. This is confirmed by Malaman, who states that product <strong>innovation</strong>s in<br />
the area <strong>of</strong> cleaner technology are more likely to be driven by spontaneous<br />
market demand than process <strong>innovation</strong>s (Malaman, 1996).<br />
Business to business demand on <strong>environmental</strong> issues is a channel <strong>of</strong><br />
<strong>environmental</strong> demands from consumer goods firms and large firms, and thus<br />
a potentially powerful driver <strong>of</strong> <strong>environmental</strong> work in small firms. This was<br />
also studied by Heidenmark, who found in her study that 75 per cent <strong>of</strong> the<br />
largest firms (>1000 employees) placed <strong>environmental</strong> demands on their<br />
suppliers, and only 10-20 per cent <strong>of</strong> the smallest firms (
technologies and products. It may also be that the <strong>environmental</strong> demands are<br />
translated into and fused with functional or other demands, so that the<br />
responding party may not be aware <strong>of</strong> the <strong>environmental</strong> dimensions in the<br />
total <strong>of</strong> demands experienced. Noci and Verganti confirm this. They claim that<br />
in most cases an SME will not explicitly classify its <strong>innovation</strong>s as<br />
<strong>environmental</strong>, because these drivers are not explicit. Environmental drivers<br />
are instead merged and hidden in the requirements <strong>of</strong> the immediate<br />
downstream customer. The more a firm is positioned in the early stages <strong>of</strong> the<br />
value chain, the higher the number <strong>of</strong> drivers indirectly experienced and the<br />
less explicit the <strong>environmental</strong> origin <strong>of</strong> the customer specifications. The<br />
difficulties for SMEs to correctly recognise <strong>environmental</strong> threats and<br />
opportunities are a consequence <strong>of</strong> the implicitness <strong>of</strong> <strong>environmental</strong><br />
<strong>innovation</strong>s drivers.<br />
Therefore, any analysis <strong>of</strong> the <strong>environmental</strong> drivers <strong>of</strong> SMEs must focus on the<br />
entire value chain. Consequently, although a firm’s immediate customer seems<br />
to have a low concern for <strong>environmental</strong> issues, this does not entail that the<br />
environment is not a strategic issue. In fact, changes in distribution, disposal<br />
and consumption regulations will probably change the requirements <strong>of</strong> both<br />
dealers and customers, whatever the market segment (Noci and Verganti, 1999).<br />
Whether a firm is part <strong>of</strong> a larger concern or not can also influence its<br />
<strong>environmental</strong> activities. Heidenmark found a strong correlation between being<br />
part <strong>of</strong> a larger concern and advancement <strong>of</strong> <strong>environmental</strong> activities<br />
(Heidenmark, 1999).<br />
The interaction between firms will cause other firms to innovate in response to<br />
<strong>environmental</strong> demands other than those they experience themselves. In the<br />
case <strong>of</strong> policy regulation, firms outside the targeted industry may well innovate<br />
more than the regulated firms do. Kemp refers to Heaton, 1990, who states that<br />
in general outsiders are more likely to develop radical solutions to<br />
<strong>environmental</strong> problems. The reason presented is that they may have the<br />
technological capabilities that the regulated industry lacks. They may also have<br />
a stronger interest in developing compliance technology, as it will mean<br />
increased sales, as compared to the investment costs <strong>of</strong> the regulated industry<br />
(Kemp, Forthcoming).<br />
28
4 Environmental policy instruments as drivers<br />
In the previous chapter <strong>environmental</strong> policy was shown to be an important<br />
driver <strong>of</strong> <strong>environmental</strong> <strong>innovation</strong>s. This chapter reviews the <strong>environmental</strong><br />
policy instruments used and what is known about their effects on <strong>innovation</strong>.<br />
These are drawn from neo-classical economics as well as from <strong>innovation</strong><br />
systems research. The text comprises both theoretical and empirical results.<br />
The relationship between policy makers and industry is not a one way relation,<br />
and policies can be seen as the result <strong>of</strong> a negotiated process. This contributes to<br />
explaining why the dynamic effects <strong>of</strong> <strong>environmental</strong> policy instruments in<br />
practise differ from the ideal instruments analysed in theory. One reason for<br />
this may be that a political process in which legislators, industry and other<br />
actors interact influences the real design <strong>of</strong> the instruments. Another reason is<br />
that <strong>environmental</strong> policy instruments is but one <strong>of</strong> many determinants <strong>of</strong><br />
<strong>innovation</strong>s. The impact <strong>of</strong> the policy instrument strongly depends on a wide<br />
range <strong>of</strong> other factors, such as technological opportunities, market structure,<br />
and appropriability opportunities (Hemmelskamp, 1997). Nevertheless there<br />
are many studies on <strong>environmental</strong> policy taking an instrumental view, and<br />
this will be the perspective in the following sections.<br />
4.1 Types <strong>of</strong> policy instruments used<br />
Some public interventions in the field <strong>of</strong> industrial environment have adopted a<br />
command and control approach, through regulations and a market-based<br />
approach that includes the use <strong>of</strong> economic instruments such as incentive taxes<br />
and tradable permits. A third option has emerged during the last years which is<br />
based on co-operation with firms and incorporates new criteria such as<br />
prevention and polluters-pays-principle and new instruments such as<br />
voluntary agreements (Aggeri, 1999). Three principal categories <strong>of</strong><br />
<strong>environmental</strong> policy instruments can be discerned 7 :<br />
Regulatory instruments can be described as institutional measures aimed at<br />
directly influencing the <strong>environmental</strong> performance <strong>of</strong> firms by establishment<br />
and enforcement <strong>of</strong> laws and regulations. These laws and regulations proscribe<br />
objectives, standards, and technologies that polluters must comply with. Their<br />
main feature is that the choice is left to the polluter to comply with, or to face<br />
penalties through judicial and administrative procedures.<br />
7 Based on similar typologies presented in OECD, Applying Economic Instruments to Evironmental<br />
Policies in OECD and Dynamic Non-member Economies and Kemp, 1998.<br />
29
This approach, which is <strong>of</strong>ten called ”command and control”, remains the most<br />
commonly used in <strong>environmental</strong> policy, although policy makers show<br />
increasing interest in the economic instruments described below.<br />
Regulatory instruments are sometimes enforced with financial penalties, with<br />
the consequence that the boundary between regulatory and economic<br />
instruments is blurred.<br />
Economic instruments “can be defined as proxies for market signals in the form<br />
<strong>of</strong> change to relative prices (through, for example, taxation <strong>of</strong> certain products)<br />
and/or a financial transfer (for instance, a tax or a charge to be paid)” (Barde<br />
and Opschoor, 1994). Subsidies and tradable permits are also included within<br />
this group.<br />
Communicative instruments. The third category <strong>of</strong> instruments, which is <strong>of</strong>ten<br />
used in conjunction with regulatory or economic ones, includes those which<br />
aim at internalising <strong>environmental</strong> awareness and responsibility into individual<br />
decision-making by applying pressure, persuasion or stimulation either directly<br />
or indirectly. This category includes approaches such as education, information<br />
extension, training, social pressure, negotiation and other forms <strong>of</strong> “moral”<br />
suasion. Voluntary agreements and network creation - match making - are also<br />
included in this category.<br />
The term “communicative instruments” highlights that these instruments are<br />
based on interactive communication rather than one-way imperatives. The<br />
difference may however be smaller than indicated by the name. For example,<br />
there is usually interactive communication in the decision process proceeding<br />
all instruments.<br />
4.2 Regulatory instruments<br />
Regulation 8<br />
Regulations include among other things product standards, product bans,<br />
technological specifications and take back-requirements.<br />
The technological responses to regulation range from the diffusion <strong>of</strong> existing<br />
technology, incremental changes to processes, product reformulation to<br />
product substitution and the development <strong>of</strong> new processes. Kemp has<br />
reviewed the literature relating to the impact <strong>of</strong> actual <strong>environmental</strong><br />
regulations on compliance <strong>innovation</strong> and clean technology. The most common<br />
responses to regulation are incremental changes to processes and products and<br />
the diffusion <strong>of</strong> existing technology (in the form <strong>of</strong> end-<strong>of</strong>-pipe solutions and<br />
non-innovative substitutions <strong>of</strong> existing substances). Long before the<br />
regulations are issued there is a search process for solutions to the problem,<br />
8 Several authors use the term ”regulation” as a synonym for all regulatory instruments including<br />
requirements, standards etc. Whereas others treat different types <strong>of</strong> regulatory instruments separately.<br />
30
oth in the regulated industry and outside with, for example, suppliers. Often<br />
firms outside the regulated industry develop the <strong>innovation</strong>s (Kemp,<br />
Forthcoming).<br />
Product regulations tend to call forth product <strong>innovation</strong>, whereas component<br />
or pollutant regulations elicit process regulations. Process regulations can<br />
stimulate process as well as product <strong>innovation</strong> (Ashford et al, 1985). Standards<br />
can stimulate <strong>innovation</strong> to reduce energy consumption (Hemmelskamp,<br />
Forthcoming).<br />
A distinction in the regulating pressure placed upon the firms can be made<br />
between Permit Based Regulation (PBR) and Incident Based Regulation (IBR).<br />
PBR firms are those that release certain amounts <strong>of</strong> regulated substances and<br />
have to seek permission from <strong>environmental</strong> regulators before releasing<br />
polluting media to the atmosphere, land or water. IBR firms are the majority <strong>of</strong><br />
firms and they have very limited interaction with <strong>environmental</strong> regulators.<br />
They will only come in contact with the regulators if an <strong>environmental</strong> problem<br />
has been traced back to the firm in question. A British study showed that IBR<br />
firms lag behind PBR firms in all <strong>of</strong> the key motivators to <strong>environmental</strong><br />
<strong>innovation</strong>. PBR firms are likely to be stimulated by both external and internal<br />
motivations, whereas IBR firms are more likely to be prompted by external<br />
factors alone such as legislation which do not significantly affect them.<br />
Generally the PBR firms surveyed could see more benefits from making<br />
<strong>environmental</strong> improvements than IBR firms could (Connell and Flynn, 1999).<br />
Theoretical observations associate several disadvantages with regulation.<br />
Mostly it is pointed out that requirements constitute the most expensive option<br />
for society, since all polluters are treated on an equal basis, irrespective <strong>of</strong> their<br />
individual avoidance costs. Thus emissions below the fixed level do not result<br />
in costs for the emitter, and consequently the emitter is no longer interested in<br />
the more far-reaching emission-reducing measures. Tightening <strong>of</strong> the standards<br />
makes steady development possible (Hemmelskamp, 1997).<br />
There are other disadvantages. Inefficiencies arise out <strong>of</strong> the varying costs <strong>of</strong><br />
individual firms and from increasing marginal costs <strong>of</strong> avoidance. Lock-in<br />
effects may also be a result, if new production installations are subject to lower<br />
limiting values or to new technology standards adjusted to the current level <strong>of</strong><br />
development that may also entail increased costs. This will decrease firms'<br />
incentives to invest in new equipment. Updating state-<strong>of</strong>-the-art technology<br />
lists is a lengthy procedure and there is a risk <strong>of</strong> the lists lagging behind new<br />
technology developments (Hemmelskamp, 1997).<br />
On the other hand, there are also theoretical advantages. As long as there is<br />
adequate monitoring and enforcement, regulatory instruments provide<br />
certainty <strong>of</strong> the policy outcome. This is necessary in case <strong>of</strong> toxic pollutants,<br />
which should be banned or rigorously controlled. Another advantage is that the<br />
authorities have longstanding experiences <strong>of</strong> this approach (OECD, 1994).<br />
31
There are several aspects to bear in mind when designing regulations. The most<br />
important factor influencing the effects on technological <strong>innovation</strong> is the<br />
stringency <strong>of</strong> regulation, which is specified as the regulation requiring<br />
significant <strong>environmental</strong> improvements, being costly or requiring significant<br />
technological change (Ashford et al, 1985). Technology-forcing standards<br />
appear to be a necessary condition for bringing about innovative compliance<br />
responses, but they may impose high costs on industry. Kemp recommends<br />
that they are used only when technological opportunities are available that can<br />
be developed at low enough costs. Strict standards should be used when the<br />
<strong>environmental</strong> risks are large and acute, and when there is a consensus about<br />
the most viable technological solution or trajectory (Kemp, Forthcoming).<br />
Regulations should at the same time be flexible, with regard to the means <strong>of</strong><br />
compliance, penalties for non-compliance and compliance time periods.<br />
Otherwise firms may judge that the compliance strategy <strong>of</strong> developing new<br />
technology is too risky. In designing standards it is important to give the<br />
industry enough time to develop solutions that are <strong>environmental</strong>ly benign and<br />
meet the requirements <strong>of</strong> important users. Time may also be needed for finding<br />
out whether a solution is <strong>environmental</strong>ly benign and does not impose hazards<br />
(Kemp, Forthcoming).<br />
Regulations should be adapted to different sectors, and this may contribute to<br />
the development <strong>of</strong> superior technological responses (Kemp, Forthcoming).<br />
32
Table 1<br />
Summary <strong>of</strong> <strong>innovation</strong> effects <strong>of</strong> regulations<br />
Effects on<br />
<strong>innovation</strong>s<br />
• diffusion, incremental<br />
<strong>innovation</strong>s<br />
• <strong>innovation</strong> outside<br />
regulated sector<br />
• affect small firms less<br />
than big<br />
• search process also<br />
before implementation<br />
Theoretical<br />
pros & cons<br />
+ certainty <strong>of</strong> the policy<br />
result<br />
+ authorities have much<br />
experience<br />
- inefficiency due to<br />
increasing marginal<br />
costs<br />
- much work for<br />
government may cause<br />
lagging standards<br />
- no effect after<br />
compliance is achieved<br />
- inefficiency due to that<br />
compliance cost varies<br />
between firms<br />
- lock-in effects<br />
Recommendations<br />
• stringency<br />
• flexible response to<br />
failure <strong>of</strong> compliance<br />
• sectoral adaptation<br />
• continuous review <strong>of</strong><br />
technical standards<br />
Liability law<br />
Liability law should also be included among the regulatory instruments as it<br />
provides the judicial basis for law suits against firms that inflict ecological<br />
harm.<br />
Liability law provides a large degree <strong>of</strong> freedom for the firms to choose<br />
measures and the risk level <strong>of</strong> their strategies. There are two types <strong>of</strong> liability<br />
principles: liability based on fault and liability regardless <strong>of</strong> fault. The former<br />
tend to give static <strong>innovation</strong> incentives as firms can restrict themselves to<br />
comply with standards <strong>of</strong> due care. Liability regardless <strong>of</strong> fault gives raise to a<br />
general and dynamic interest in <strong>innovation</strong>s on the part <strong>of</strong> firms. There are also<br />
various types <strong>of</strong> limited liabilities. Limitations require third parties to pay the<br />
bill <strong>of</strong> caused damages and are unlikely to lead to full internalisation <strong>of</strong> costs.<br />
Problematic may be that the injured third party may be in a weaker position<br />
with regard to the information needed for proving the causality between action<br />
and damage. Firms and authorities are likely to be in stronger positions<br />
(Hemmelskamp, 1997)<br />
33
Table 2 Summary <strong>of</strong> <strong>innovation</strong> effects <strong>of</strong> some specific regulatory<br />
instruments<br />
Effects on<br />
<strong>innovation</strong>s<br />
Technology forcing<br />
standards<br />
Theoretical<br />
pros & cons<br />
Recommendations<br />
• give industry enough<br />
time to comply<br />
• radical <strong>innovation</strong>s • use when technological<br />
opportunities are<br />
available at low cost<br />
Product regulation<br />
• product <strong>innovation</strong><br />
(whereas component<br />
and pollutant regulation<br />
cause more process<br />
<strong>innovation</strong>s)<br />
Permit based regulation<br />
• larger effects than<br />
incident based<br />
regulation<br />
Liability law + large freedom <strong>of</strong> firms<br />
to choose strategy<br />
+ liability gives stronger<br />
incentives than fault<br />
- limitations may put cost<br />
on third party<br />
4.3 Economic instruments<br />
Economic instruments are flexible in that they provide firms a large space for<br />
manoeuvre, and is believed to lead to the cost-effective attainment <strong>of</strong> objectives.<br />
Economic instruments give firms economic freedom to choose and to adapt<br />
their activities, leaving them free to maximise pr<strong>of</strong>it through whatever solution<br />
is the most economically efficient in their particular case (Barde and Opschoor,<br />
1994). Economic instruments have the theoretical benefit <strong>of</strong> flexibility in the<br />
sense <strong>of</strong> <strong>of</strong>fering a choice between compliance and paying the polluter’s bill<br />
(Kemp, Forthcoming).<br />
When fixed at the proper level, economic instruments facilitate the costeffective<br />
attainment <strong>of</strong> objectives. Polluters reduce their emission as long as the<br />
34
marginal cost <strong>of</strong> abatement is lower than the charge rate, and prefer paying the<br />
charge when the marginal costs <strong>of</strong> reducing more emissions are higher than the<br />
charge rate. In this way, economic instruments always <strong>of</strong>fer incentives for<br />
<strong>environmental</strong>ly adapted behaviour because <strong>of</strong> the possibility <strong>of</strong> both<br />
abatement cost and charge payment savings. This creates a constant demand for<br />
<strong>innovation</strong>. Firms, however, are not always responsive to price signals. The<br />
price incentive must be sufficiently high to induce firms to develop and<br />
implement new technologies (Kemp, Forthcoming).<br />
From the policy makers viewpoint economic instruments also have advantages.<br />
They are easily introduced and therefore engender lower decisional costs<br />
(Kemp, Forthcoming). Once introduced, they can also easily be modified.<br />
Economic instruments are also revenue raising for the government.<br />
Disadvantages are the uncertainty <strong>of</strong> how the polluters respond and the total<br />
costs (abatement costs and tax payments), which are likely to be high. Tradable<br />
pollution quotas do not suffer from the latter disadvantage. There are also<br />
problems with international competitiveness (Kemp, Forthcoming).<br />
The overall theoretical conclusion is that economic instruments like levies are<br />
more likely to prompt <strong>innovation</strong>s than juridical measures such as<br />
requirements. Juridical measures favour end-<strong>of</strong>-pipe technology <strong>innovation</strong>s,<br />
whereas economic instruments mostly prompt <strong>innovation</strong> in the field <strong>of</strong><br />
integrated technologies (Hemmelskamp, 1997; Kemp, Forthcoming).<br />
However, economic instruments or regulations are better suited than voluntary<br />
agreements to stimulating the diffusion <strong>of</strong> end-<strong>of</strong>-pipe technologies, but less<br />
suited than voluntary agreements to stimulating integrated <strong>innovation</strong>s.<br />
Diffusion <strong>of</strong> end-<strong>of</strong>-pipe technologies does not require co-ordination <strong>of</strong> firms as<br />
much as strong individual incentives and/or sanctions. In line with this there is<br />
an extensive use <strong>of</strong> economic instruments and regulations in process sectors,<br />
like in energy efficiency, plant emissions, waste incineration plants etc (Aggeri,<br />
1999).<br />
35
Table 3<br />
Summary <strong>of</strong> <strong>innovation</strong> effects <strong>of</strong> economic instruments<br />
Effects on<br />
<strong>innovation</strong>s<br />
Theoretical<br />
pros & cons<br />
+ cost-effective<br />
+ large freedom <strong>of</strong> firms to<br />
choose strategy<br />
+ continuous incentive<br />
+ easy to introduce and<br />
modify<br />
+ give revenue to<br />
government<br />
- affect international<br />
competition<br />
- uncertainty <strong>of</strong> outcome<br />
- firms may be<br />
unresponsive to the cost<br />
- too weak co-ordination<br />
<strong>of</strong> firms<br />
Recommendations<br />
Taxes<br />
Effluent levies have been charged in Germany since 1981, and were<br />
complemented in 1990 by a state-<strong>of</strong>-the-art technology based standard<br />
regulation. The mere announcement <strong>of</strong> the levy laws initiated responses by<br />
firms. Compliance problems were related to difficulties in obtaining<br />
information and uncertainty about the costs for small and medium sized firms.<br />
Some firms changed their product range or externalised areas <strong>of</strong> production.<br />
The combination <strong>of</strong> levies and standards has been criticised by several<br />
researchers, claiming that taking into account state-<strong>of</strong>-the-art technology<br />
mitigates the effects <strong>of</strong> the levy (Hemmelskamp, 1997).<br />
Environmental taxes can stimulate a reduction in the <strong>environmental</strong> impact<br />
arising from the production and development <strong>of</strong> <strong>environmental</strong>ly friendly<br />
products, whereas standards would have no or a negative impact, according to<br />
a German study. Standards, on the other hand are shown to stimulate<br />
<strong>innovation</strong> to reduce energy consumption. Taxes hamper such <strong>innovation</strong>s.<br />
These results should be interpreted with caution as the experience <strong>of</strong><br />
<strong>environmental</strong> taxes in Germany in 1991 was very limited, and the results may,<br />
36
according to Hemmelskamp (Forthcoming), reflect the lively debate on<br />
<strong>environmental</strong> taxes at the time. The results seem to show that economic<br />
instruments have advantages in the case <strong>of</strong> <strong>environmental</strong> product <strong>innovation</strong>s,<br />
but that there are no general advantages <strong>of</strong> one type <strong>of</strong> instrument over another<br />
related to <strong>environmental</strong> process <strong>innovation</strong>s (Hemmelskamp, Forthcoming).<br />
A common criticism against <strong>environmental</strong> taxation is that countries, which<br />
unilaterally adopt such policy measures, lose competitiveness. Carraro and<br />
Galeotti have reviewed studies that provide additional critical remarks. On the<br />
grounds <strong>of</strong> efficiency, emission permits have been shown to improve on<br />
emission charges when the inter-temporal decisions <strong>of</strong> agents, particularly on<br />
<strong>innovation</strong>, cannot be neglected. Moreover, when more than one externality has<br />
to be accounted for, <strong>environmental</strong> taxation must be combined with other<br />
policy instruments to achieve the social optimum. Information asymmetries<br />
(such as in non-point source pollution problems) invite policy interventions that<br />
are far more complex than <strong>environmental</strong> taxation (Carraro and Galeotti, 1997).<br />
A tax and its related revenue can be directed to foster technological <strong>innovation</strong>,<br />
but Carraro and Galeotti point to some recent analysis that shows that<br />
<strong>environmental</strong> taxes or emission permits are likely to be sub-optimal<br />
instruments for achieving an adequate level <strong>of</strong> technological <strong>innovation</strong>.<br />
Studies have shown that, in a dynamic framework, taxes or permits can lead to<br />
the over investment in <strong>environmental</strong> <strong>innovation</strong> (Carraro and Galeotti, 1997).<br />
Charges<br />
Charges stimulate voluntary and individual adaptations in order to prevent or<br />
reduce <strong>environmental</strong> impacts. Quite simply, the bigger the cost advantage <strong>of</strong><br />
innovating as compared to paying the charges the greater the incentive to<br />
innovate. The political process <strong>of</strong> fixing the rate <strong>of</strong> the charges is, however,<br />
difficult. Finding the most effective level presupposes information on the<br />
marginal avoidance costs <strong>of</strong> all polluters, information that in real life does not<br />
exist. Rather trial-and-error methods are used, and this hampers efficiency<br />
(Hemmelskamp, 1997).<br />
Tradable permits<br />
The term tradable permits refers to deliberately created markets where actors<br />
buy and sell “rights” or permits for actual or potential pollution.<br />
There are two basic models on how to construct a system <strong>of</strong> tradable<br />
permits/reductions: the cap and trade model and the baseline and credit<br />
model.<br />
The cap and trade model defines a total ceiling <strong>of</strong> pollution from polluters<br />
included withn a system. The total amount <strong>of</strong> pollution in the pollution cap is<br />
divided between the polluters. The shares allocated to the polluters could be<br />
given out free <strong>of</strong> charge or be auctioned <strong>of</strong>f. At the end <strong>of</strong> the period that is to<br />
37
e controlled that the emission from a source equals the total permits held by<br />
the polluter. In the cap and trade model questions about the size <strong>of</strong> the cap, the<br />
distribution <strong>of</strong> the permits, control and sanctions etc are decided at the start <strong>of</strong><br />
the process. After these questions are settled, actors can trade with only a<br />
minimal degree <strong>of</strong> intervention from the authorities, thereby reducing the<br />
overall transaction costs incurred.<br />
The baseline and credit model is based on projects intent on reducing pollution.<br />
A hypothetical baseline scenario must be made up for every project, and<br />
describes how much pollution would be emitted without the project. This<br />
scenario is then compared with the emissions within the project. To be valid all<br />
emission reductions created must be approved. The transaction cost could end<br />
up being high (SOU 2000:45).<br />
Tradable permits have the advantage <strong>of</strong> <strong>of</strong>fering a permanent <strong>innovation</strong><br />
incentive. The setting <strong>of</strong> permit levels presupposes information on the desired<br />
goals in terms <strong>of</strong> <strong>environmental</strong> quality and permissible emission volumes,<br />
which is not always available. Another problem may be that it is possible for<br />
incumbent firms to create entry barriers by hoarding emission entitlements,<br />
thereby making new production facilities illegal or more likely artificially<br />
expensive. Time limited permits <strong>of</strong>fer authorities the possibility to respond<br />
more flexibly to changed political objectives or to changed ecological<br />
parameters. Time limits incur a cost on firms, as they impose a large uncertainty<br />
on firms, which may result in incremental and end-<strong>of</strong>-pipe solutions being<br />
favoured. Unlimited permits, however devalued by authorities, create better<br />
conditions to innovate (Hemmelskamp, 1997).<br />
Subsidies<br />
Subsidies include various forms <strong>of</strong> financial assistance such as grants, s<strong>of</strong>t<br />
loans, tax allowances or charge relief. Subsidies change the incentive structure.<br />
They intend to encourage reductions in pollution or <strong>environmental</strong>ly sound<br />
management <strong>of</strong> resources.<br />
Subsidies and taxes theoretically have the same impact on the rates <strong>of</strong> return<br />
faced by consumers <strong>of</strong> energy, but subsidies have been found to be three times<br />
more effective than taxes in promoting investment in energy-efficient<br />
technologies (Azar and Dowlatabdi, 1999).<br />
However, several studies in the Netherlands have shown that subsidies have<br />
most <strong>of</strong>ten had a limited impact on decisions concerning investment in<br />
<strong>environmental</strong>ly beneficial technologies. Three different subsidy schemes were<br />
investigated and it was observed that subsidies were the primary reason for<br />
investment in only 0 - 2 per cent <strong>of</strong> the investigated firms. Factors like fuel<br />
economy, road performance and comfort (silent trucks), health and safety<br />
considerations (PCB) and <strong>environmental</strong> regulation (manure storage) were<br />
more important (Kemp Forthcoming).<br />
38
The Dutch studies looked for the primary reason <strong>of</strong> investment decisions. This<br />
may underplay the smaller, but non-negligible, contribution that subsidies<br />
make to investment decisions.<br />
Investment in technology may refer to purchases <strong>of</strong> existing technology, as well<br />
as to efforts to develop new technology.<br />
R&D subsidies<br />
R&D subsidies may take the form <strong>of</strong> a general instrument when implemented<br />
as a tax relief or as a targeted instrument when implemented as payments to<br />
selected R&D projects.<br />
Uncertainty about the demand for cleaner technologies may call for the use <strong>of</strong><br />
R&D subsidies or loans. The use <strong>of</strong> subsidies should be restricted to<br />
<strong>environmental</strong>ly beneficial technologies for which a market does yet not exist,<br />
due to, for example, long development times or problems <strong>of</strong> appropriating<br />
<strong>innovation</strong> benefits. Uncertainty about the solutions to problems is another<br />
rationale for using R&D subsidies. The subsidies may in this case be used to<br />
increase the number <strong>of</strong> potential solutions to the problem (Kemp,<br />
Forthcoming).<br />
Results, though scarce, on the effectiveness on R&D subsidies suggest that they<br />
have a limited impact on investments in <strong>environmental</strong> technologies research.<br />
A Danish example indicates that the active match making <strong>of</strong> firms, institutes etc<br />
for co-operative projects increases the effectiveness <strong>of</strong> R&D subsidies (Kemp<br />
Forthcoming).<br />
39
Table 4<br />
Summary <strong>of</strong> <strong>innovation</strong> effects <strong>of</strong> specific economic instruments<br />
Effects on<br />
<strong>innovation</strong>s<br />
Theoretical<br />
pros & cons<br />
Recommendations<br />
Taxes<br />
• some effects on product<br />
and process <strong>innovation</strong><br />
• search process also<br />
before implementation<br />
Charges - difficult to set rates<br />
Tradable permits + continuous incentives • unlimited time <strong>of</strong> permits<br />
Subsidies<br />
• limited effects (diffusion)<br />
• more effects than taxes<br />
(energy, diffusion)<br />
- difficult to set goals • devalued permits<br />
- may give entry barriers<br />
R&D subsidies + increase number <strong>of</strong><br />
candidate solutions<br />
• when uncertainty about<br />
demand or solution<br />
hampers <strong>innovation</strong><br />
• limited effects (R&D) • active match making for<br />
cooperative projects<br />
4.4 Communicative instruments<br />
Voluntary agreements<br />
Voluntary agreements are undertakings made collectively by parts <strong>of</strong> industry,<br />
<strong>of</strong>ten when facing an implicit threat <strong>of</strong> compelling policy actions. The implicit<br />
threat blurs the boundary between voluntary agreements and compelling<br />
regulatory or economic instruments.<br />
40
Kemp claims that the effectiveness <strong>of</strong> voluntary agreements is typically small.<br />
When <strong>environmental</strong> improvements were achieved, this was more due to<br />
autonomous technological change, external regulations and the evolution <strong>of</strong><br />
market demand than to voluntary agreements. There is little evidence the<br />
voluntary agreements foster technological <strong>innovation</strong>s (Kemp, Forthcoming).<br />
Integrated <strong>innovation</strong>s may concern a wide range <strong>of</strong> actors, organisations, and<br />
technologies, since many problems are tackled on an international scale and<br />
require extensive co-operation between heterogeneous actors. The larger the<br />
number <strong>of</strong> actors and transformation stages and the higher the level <strong>of</strong><br />
uncertainty, the greater is the need for the strong co-ordination <strong>of</strong> firms.<br />
Needing to act towards such an <strong>environmental</strong> threat with high uncertainty,<br />
pinpointing the general interest is not self-evident. It is not impossible to set<br />
targets, but problems lay in the fact that the targets must be recognised by all<br />
parties, who must also accept the risk that an initial error <strong>of</strong> orientation may<br />
occur and that the targets may be revised when new information comes to light.<br />
In such circumstances voluntary agreements may be justified, especially when<br />
they are devised from the start as schemes for learning and for monitoring<br />
<strong>innovation</strong>, and not as inviolable contracts. If stronger incentives are needed<br />
however, voluntary agreements could be complemented by the use <strong>of</strong> economic<br />
instruments (Aggeri, 1999).<br />
Other advantages and disadvantages <strong>of</strong> voluntary agreements are identified by<br />
Kemp. By handing over responsibility for achieving <strong>environmental</strong><br />
improvements to industry, voluntary agreements may stimulate the<br />
<strong>environmental</strong> responsibility <strong>of</strong> firms. This is important for the wider<br />
integration <strong>of</strong> <strong>environmental</strong> concerns into the decisions taken by firms. On the<br />
other hand there is a risk <strong>of</strong> ”institutional capture” <strong>of</strong> policies by special<br />
interests. Voluntary agreements are attractive to regulatory bodies because they<br />
lower the administrative burden and establish a better, more co-operative<br />
relationship with business. However, the disadvantages with voluntary<br />
agreements is that they allow for free-rider behaviour, encourage firms to claim<br />
that is impossible to meet the targets and therefore lead to the underexploitation<br />
<strong>of</strong> <strong>innovation</strong> opportunities. They also <strong>of</strong>fer little incentives for<br />
third-party suppliers to develop compliance technologies (Kemp, Forthcoming).<br />
It is necessary to draw up clear and transparent rules prior to the agreement.<br />
Voluntary agreements should include quantitative objectives, designation <strong>of</strong><br />
responsibilities, know-how transfer rules, monitoring schemes, etc (Aggeri,<br />
1999).<br />
Eco audits<br />
Eco Audits are required <strong>of</strong> firms in order for them to be certificated in<br />
accordance with some <strong>environmental</strong> management standards. Such standards<br />
can be implemented by law. They aim at facilitating <strong>environmental</strong> work within<br />
firms and communication about firms’ <strong>environmental</strong> work.<br />
41
Experience show that eco-audits can result in management and other functions<br />
<strong>of</strong> the firm, such as R&D, being integrated into <strong>environmental</strong> policy. They can<br />
also improve the internal transparency <strong>of</strong> firms, which may make it possible to<br />
identify unnoticed starting points for environment-relieving measures, in<br />
particular they may identify integrated measures (Hemmelskamp, 1997).<br />
There are other potential advantages and disadvantages with eco-audits. Ecoaudits<br />
have begun to be used as a public relations instrument. This may be a<br />
problem if the focus <strong>of</strong> attention is shifted away from in-house conditions. The<br />
s<strong>of</strong>t regulation allows for a firm to take only superficial measures, reducing the<br />
impact on firm activities. It is also the firms who have the responsibility to<br />
compile a catalogue <strong>of</strong> measures to be taken. The regulation is also limited to<br />
“economically justifiable” measures, which is open to interpretation and<br />
reduces pressure on firms. As competitiveness and demand pressures increase<br />
on SMEs to take part in the EC eco-audit scheme, they may catch up on the<br />
larger firms in working with eco-audits. This way the regulation could produce<br />
effective impacts on <strong>innovation</strong>s in such firms (Hemmelskamp, 1997).<br />
Network creation<br />
Network creation can be achieved in several ways, such as through dialogue<br />
and subsidies. Network creation aims at stimulating co-operation and<br />
increasing access to external competence.<br />
A Danish programme shows that network creation can be successful in<br />
stimulating <strong>innovation</strong>s. Five case studies <strong>of</strong> clean technology development<br />
projects in Denmark were conducted. Most <strong>of</strong> the technological solutions<br />
developed were process oriented. Some firms were able to cut costs by<br />
substituting inputs, and some results were patented or introduced onto the<br />
market. A success factor <strong>of</strong> the initiative was that the eligibility criteria took into<br />
consideration that other than the polluting firm may contribute to the<br />
technological solution, and hence supported collaboration between polluting<br />
firms, customers, suppliers and consultants (Hemmelskamp, 1997).<br />
42
Table 5 Summary <strong>of</strong> <strong>innovation</strong> effects <strong>of</strong> communicative instruments (1)<br />
Effects on<br />
<strong>innovation</strong>s<br />
Theoretical<br />
pros & cons<br />
Voluntary agreements + integrated <strong>innovation</strong>s,<br />
product <strong>innovation</strong>s<br />
• small effects + coordination <strong>of</strong> actors<br />
around complex<br />
problems<br />
+ network development<br />
+ stimulate responsibility<br />
<strong>of</strong> firms<br />
+ stimulate co-operation<br />
between industry and<br />
government<br />
+ can be dynamic<br />
+ low administrative<br />
burden<br />
- free riders<br />
- low third party<br />
incentives<br />
- too week<br />
steering/incentives<br />
Recommendations<br />
• should include a wide<br />
array <strong>of</strong> clear and<br />
transparent rules<br />
• use when uncertainty<br />
and need fro coordination<br />
is high<br />
Eco audit standards + R&D & management<br />
integration<br />
Network creation<br />
• some effects<br />
+ transparency giving<br />
impulses for <strong>innovation</strong><br />
+ may give focus on<br />
public relations rather<br />
than internal problems<br />
+ may involve SMEs<br />
- too weak incentives<br />
43
Examples <strong>of</strong> communicative instruments are missing from this report due to<br />
the lack <strong>of</strong> relevant material are procurement – both standard and advanced<br />
technology procurement - and information supply.<br />
4.5 Summary and comments<br />
There are few empirical results to enable anything certain to be said about the<br />
effects on <strong>innovation</strong> <strong>of</strong> <strong>environmental</strong> policy instruments. Most instruments<br />
studied have had only limited effects on <strong>innovation</strong>. Technology forcing<br />
standards may hold the largest potential for radical <strong>innovation</strong>s.<br />
Table 6<br />
Overview <strong>of</strong> effects on <strong>innovation</strong><br />
Regulatory instruments<br />
Regulations - diffusion, incremental<br />
<strong>innovation</strong>s<br />
- <strong>innovation</strong> outside<br />
regulated sector<br />
- affect small firms less<br />
than big<br />
- search process also<br />
before implementation<br />
Economic instruments<br />
Taxes - some effects on process<br />
and product <strong>innovation</strong><br />
- search process also<br />
before implementation<br />
Subsidies - more effects than taxes<br />
(regards energy and<br />
diffusion)<br />
- limited effects<br />
Technology<br />
forcing standards<br />
- radical <strong>innovation</strong>s<br />
Product<br />
regulation<br />
Component,<br />
pollutant<br />
regulation<br />
Permit based<br />
regulation<br />
- product rather than<br />
process <strong>innovation</strong>s<br />
- process rather than<br />
product <strong>innovation</strong>s<br />
- larger effects than<br />
incident based<br />
regulation<br />
Communicative<br />
instruments<br />
Voluntary<br />
agreements<br />
- small effects<br />
Network creation - some effects<br />
There are, however, large gaps in the empirical data on many instruments, and<br />
the instruments may be more or less effective than indicated here. One reason<br />
for the lack <strong>of</strong> data is that some <strong>of</strong> the instruments have been implemented<br />
quite recently and only in a handful <strong>of</strong> instances. It is also possible that the<br />
extensive literature search has not identified all <strong>of</strong> the studies undertaken.<br />
44
There is clearly a need for more empirical research on the effects on <strong>innovation</strong>s<br />
<strong>of</strong> <strong>environmental</strong> policy instruments.<br />
This analysis is made from the perspective <strong>of</strong> effects on <strong>innovation</strong>. Other<br />
perspectives will highlight other properties <strong>of</strong> the instruments and result in<br />
other insights and recommendations.<br />
45
5 Conclusions<br />
The aim <strong>of</strong> this study has been to survey the existing literature on how external<br />
demands drive <strong>environmental</strong> <strong>innovation</strong> in firms, and to provide an overview<br />
<strong>of</strong> this literature. This is done with a view to contributing to the work <strong>of</strong><br />
Swedish policy makers.<br />
5.1 Conclusions on drivers <strong>of</strong> <strong>environmental</strong> inovations<br />
Environmental <strong>innovation</strong>s are driven by specific <strong>environmental</strong> demands and<br />
may contribute to decreased <strong>environmental</strong> impact, but they also seem to<br />
possess other properties that single them out in comparison to other<br />
<strong>innovation</strong>s. Among other things <strong>environmental</strong> <strong>innovation</strong>s involve social<br />
awareness, draw upon knowledge from a very wide range <strong>of</strong> fields and require<br />
complementary organisational <strong>innovation</strong>s.<br />
The conditions that favour <strong>environmental</strong> <strong>innovation</strong>s are complex and difficult<br />
to study for many reasons. The incentive structure is complex with many<br />
drivers and many interested parties. Inter-firm communication <strong>of</strong><br />
<strong>environmental</strong> demands is interwoven with the communication <strong>of</strong> other<br />
demands. The knowledge fields that may contribute to <strong>environmental</strong><br />
<strong>innovation</strong>s are diverse. Environmental <strong>innovation</strong>s may take place in all<br />
industry sectors.<br />
There is little knowledge about the <strong>environmental</strong> demands <strong>of</strong> customers and<br />
the market related <strong>environmental</strong> dynamics independent <strong>of</strong> <strong>environmental</strong><br />
policy. Yet, regulation is considered by most authors to be a very important<br />
driver. The role <strong>of</strong> government in <strong>environmental</strong> <strong>innovation</strong>s is probably bigger<br />
than for most other types <strong>of</strong> <strong>innovation</strong>s. A change towards market driven<br />
<strong>environmental</strong> work in firms is taking place.<br />
Also little is known about the effects <strong>of</strong> <strong>environmental</strong> policy instruments, not<br />
least because empirical results are scarce. Probably <strong>environmental</strong> policy<br />
instruments have had limited effects, but on the other hand stimulating<br />
<strong>innovation</strong> has usually not been an aim when introducing them. There is thus a<br />
need to adapt <strong>environmental</strong> policies to stimulate <strong>innovation</strong>s, as well as to<br />
integrate <strong>environmental</strong> and technology policies into a coherent whole.<br />
Different theoretical perspectives lead to different policy recommendations.<br />
Economics tend to advocate economic instruments for efficiency reasons,<br />
because they uniformly affect all players within an industry and thus do not<br />
disturb market competition. Innovation researchers are more prone to propose<br />
communicative measures, arguing that policy instruments should explicitly<br />
target coordination, networking, learning processes and system specific<br />
46
conditions. These perspectives are to some extent contradictory but they are<br />
also complementary. Economic, regulatory and communicative instruments<br />
may all stimulate <strong>environmental</strong> <strong>innovation</strong>s.<br />
5.2 Policy conclusions<br />
Industrial <strong>innovation</strong>s may contribute to shifting society towards sustainable<br />
development. For this to happen there is a need for improved <strong>environmental</strong><br />
policy as well as <strong>environmental</strong>ly motivated <strong>innovation</strong> policy. The following<br />
aspects should be taken into consideration.<br />
• Both sustainability and growth require increased cooperation between the areas <strong>of</strong><br />
<strong>innovation</strong> and <strong>environmental</strong> policy<br />
Environmental policies seldom explicitly target <strong>innovation</strong> processes. Increased<br />
attention to <strong>innovation</strong> issues and improving policies to this end may increase<br />
their effectiveness in addressing <strong>environmental</strong> problems. Stringency, flexibility<br />
and timing <strong>of</strong> instruments are examples <strong>of</strong> aspects to consider.<br />
There is a shift going on from regulation as the main driver <strong>of</strong> <strong>environmental</strong><br />
<strong>innovation</strong>s to a situation where both regulation and market forces drive. With<br />
this shift comes the increased strategic awareness in firms <strong>of</strong> the importance <strong>of</strong><br />
<strong>environmental</strong> <strong>innovation</strong>. The shift would bring about more integrated<br />
process <strong>innovation</strong>s and product <strong>innovation</strong>s. The strategies <strong>of</strong> firms broaden<br />
from regulation compliance and cost reduction to the exploitation <strong>of</strong> the pr<strong>of</strong>it<br />
potentials that lies in <strong>environmental</strong> innovativeness. This implies that increased<br />
attention should be given to <strong>environmental</strong> <strong>innovation</strong> within <strong>innovation</strong><br />
policy both to increase growth and to reduce the impact on the environment.<br />
• Policies should target value chains and networks, especially to involve SMEs<br />
The systemic interdependencies <strong>of</strong> a firm’s <strong>innovation</strong> processes may<br />
contribute to explain why small firms experience, to a lesser extent,<br />
<strong>environmental</strong> demands. Environmental demands from customer firms may be<br />
mixed with, and translated into, other demands, thereby creating an<br />
<strong>environmental</strong> pressure that is not experienced as such by the supplier. It may<br />
also be the case that <strong>environmental</strong> issues are important to customer firms, even<br />
if they have not begun to make <strong>environmental</strong> demands on their suppliers.<br />
Supplier firms need to be aware <strong>of</strong> the strategic importance <strong>of</strong> such<br />
unexpressed interests. This implies that policies should target value chains and<br />
networks rather than individual firms.<br />
47
• There is a choice to be made between quick results and large results<br />
Increased investment in already available technology may bear fruition sooner<br />
than new technology, which requires time consuming development work and<br />
at times lengthy research.<br />
It is important to give more attention to the time span involved in developing<br />
technology and new products when designing policy. This is an important<br />
factor determining the outcome in terms <strong>of</strong> <strong>innovation</strong>s. Instruments also vary<br />
with respect to when the <strong>innovation</strong> effects will appear.<br />
• Policy instruments should be used in a coordinated manner for best effect<br />
Since there is no single best instrument, with instruments have differing<br />
strengths and weaknesses, and influence one another, policy makers should<br />
give ample attention to the problems and possibilities <strong>of</strong> simultaneous and<br />
coordinated use <strong>of</strong> more than one instrument.<br />
• Regulation stimulates <strong>innovation</strong>. Apart from that we do not know, yet.<br />
Regulation can stimulate <strong>innovation</strong>s, even radical ones. Regulations that<br />
cannot be met with available technology, but where appropriate technology can<br />
be developed at a reasonable cost and in the not too distant future, can<br />
stimulate radical <strong>innovation</strong>s. Such regulations may however impose high costs<br />
on the regulated firms. Concern should also be given to the effect on the<br />
international competitiveness <strong>of</strong> firms when using regulations.<br />
Apart from regulations there is little knowledge about the effects on<br />
<strong>innovation</strong>s <strong>of</strong> <strong>environmental</strong> policy instruments. It is also difficult to say what<br />
<strong>environmental</strong> policy instrument really has what effect on <strong>innovation</strong>s. How an<br />
instrument is implemented may strongly influence the outcome. More<br />
knowledge is needed to understand how best to stimulate <strong>environmental</strong><br />
<strong>innovation</strong>. A broad range <strong>of</strong> instruments should be used in order to<br />
experiment and find out what works best. Evaluations should include the<br />
<strong>innovation</strong> dimension. All these require <strong>innovation</strong> orientated studies to be<br />
conducted.<br />
5.3 Areas for further studies<br />
To better understand the possibilities and limitations <strong>of</strong> government action in<br />
this area, it is important to give some areas more attention in future studies.<br />
48
This study shows that the way <strong>environmental</strong> demands enter into business<br />
processes is complex. Firm interaction mediates and transforms <strong>environmental</strong><br />
demands. The relation between customers and suppliers in value chains is a<br />
vital part <strong>of</strong> most <strong>innovation</strong> processes. Customers have a role in the provision<br />
<strong>of</strong> information necessary for suppliers to develop <strong>environmental</strong> <strong>innovation</strong>s.<br />
Customer supplier co-operation is likely to be an important and efficient means<br />
<strong>of</strong> mutual learning.<br />
A very broad range <strong>of</strong> competences is necessary to deal with the <strong>environmental</strong><br />
dimension <strong>of</strong> the <strong>innovation</strong> process. The problem-solving networks related to<br />
<strong>environmental</strong> <strong>innovation</strong>s may be more complex than for other types <strong>of</strong><br />
<strong>innovation</strong>s, and deserve special attention. Additionally, the public knowledge<br />
infrastructure must be adapted to meet the broad range <strong>of</strong> needs related to<br />
<strong>environmental</strong> <strong>innovation</strong>s.<br />
Most likely a lot <strong>of</strong> <strong>innovation</strong>s contribute to <strong>environmental</strong> progress without<br />
having this as an objective. It is important to understand what <strong>innovation</strong>s,<br />
which improve the <strong>environmental</strong> status <strong>of</strong> production, would be developed<br />
without explicit <strong>environmental</strong> ambitions in firms, and what is to be gained<br />
adding from <strong>environmental</strong> drivers to those already in place.<br />
Sustainable development demands radical shifts in society, and systemic shifts<br />
<strong>of</strong> production, distribution and consumption. For this to occur there is a need<br />
for systemic <strong>environmental</strong> <strong>innovation</strong>s. Good historical examples <strong>of</strong> such<br />
<strong>innovation</strong>s may inspire future action, by shedding light on the preconditions<br />
and possible role <strong>of</strong> government in the <strong>innovation</strong> processes.<br />
Too little is known about the effects on <strong>innovation</strong>s <strong>of</strong> <strong>environmental</strong> policy<br />
instruments. There are some results on regulatory instruments, but less on<br />
economic and communicative instruments. Voluntary agreements are especially<br />
interesting, as there is much current interest in them among policy makers.<br />
They may also illustrate the strengths and weaknesses <strong>of</strong> interactive policy<br />
making, an area that receives a lot <strong>of</strong> interest in Sweden today.<br />
49
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mekanismer inom klimatområdet” 9 , SOU 2000:45<br />
Hauknes, J. and Norgren, L. (1999) “Economic rationales <strong>of</strong> government<br />
involvement in <strong>innovation</strong> and the supply <strong>of</strong> <strong>innovation</strong>-related services”,<br />
report from the TSER-project RISE<br />
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fortfarande myt?” 10 , International Institute for Industrial Environmental<br />
Economics, Lund<br />
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Hemmelskamp, J. (Forthcoming) “Environmental Taxes and Standards: An<br />
Empirical Analysis <strong>of</strong> the Impact on Innovation”, to be published in<br />
“Innovations-oriented Environmental Regulation - Theoretical Approaches and<br />
Empirical Analysis” by Hemmelskamp, Rennings and Leone<br />
Hemmelskamp, J. (1997) “Environmental policy instruments and their effect on<br />
<strong>innovation</strong>”, European Planning Studies, 5(2):177-193<br />
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Questions for Research”, in “Papers presented at the Expert Meeting on<br />
‘Regulation and Innovation’ ”, Sevilla, 18-19, January 1998<br />
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change”<br />
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Institute <strong>of</strong> the Finnish Economy (ETLA) and Government institute for<br />
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– a literature survey” (in Swedish), SOU 1997:11 “Taxes, environment and<br />
employment”, Annex<br />
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11 ”Environmentally oriented business development - From demands <strong>of</strong> authorities to strategic options”<br />
12 Royal Swedish Academy <strong>of</strong> Engineering Sciences<br />
13 This paper has not undergone the review accorded <strong>of</strong>ficial NBER publications. It is intended to make<br />
results <strong>of</strong> NBER research available to other economists in preliminary form to encourage discussion and<br />
suggestions for revision before final publication.<br />
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Vol 9 Issue 4, p 97, 22 p<br />
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1998<br />
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Competitiveness: The Porter Hypotheses and the Composition <strong>of</strong> Capital”,<br />
Journal <strong>of</strong> Environmental Economics and Management 37, 165-182<br />
14 Working Group on Innovation and Technology Policy<br />
52
Appendix 1<br />
Theoretical approaches to <strong>innovation</strong>s<br />
For a long time the dominant perspective on <strong>innovation</strong> was a model usually<br />
referred to as the linear model. In this perspective basic research produced<br />
results that could be further developed initially in applied research, and then<br />
later on in product and process development. The final phase is the<br />
introduction <strong>of</strong> new products and services onto the market. The linear model<br />
presupposes that knowledge is always articulated and codifiable, and that it<br />
can readily be shipped from one production site (basic research institutions) to<br />
another (applied research institutions) etc. This perspective works well in<br />
conjunction with the basic assumption <strong>of</strong> neo-classical economics that all<br />
existing information is available to everyone, everywhere, and that new<br />
knowledge is immediately accessible to everyone.<br />
This assumption is crucial to the traditional neo-classic models where<br />
technology is treated as an external factor. At any specific time there is suppose<br />
to be a stock <strong>of</strong> publicly shared technical knowledge. When new knowledge is<br />
produced it immediately becomes part <strong>of</strong> the stock, and is available to<br />
everyone. Neo-classical and new classical economics focus on problems <strong>of</strong><br />
allocation <strong>of</strong> resources in a general equilibrium context. The problem for a<br />
rational agent is to choose among possible allocations <strong>of</strong> scarce resources in a<br />
situation where all relevant information is known. The sum <strong>of</strong> the choices <strong>of</strong> all<br />
agents in a market will result in an equilibrium situation where demand and<br />
supply meet in the most cost efficient way.<br />
When studying growth, economics researchers determined that traditional<br />
production factors could only explain part <strong>of</strong> the observed growth in the<br />
economy. The remainder was termed the technology factor. This has become<br />
the starting point <strong>of</strong> later work that has tried to model technological<br />
development as an endogenous factor within the framework <strong>of</strong> traditional<br />
economics.<br />
There has also been a development <strong>of</strong> economic theories and research<br />
approaches that more fundamentally depart from the assumptions <strong>of</strong><br />
traditional economics. Nelson and Winter in the late 1970s claimed that there is<br />
more than one techno-economic solution that is effective, in contrast is the one<br />
optimal solution advocated by traditional economics. In the 1980s Rosenberg<br />
presented a new model <strong>of</strong> <strong>innovation</strong> which replaced the linear model. This<br />
new model emphasises feedback and interaction among the actors in the<br />
<strong>innovation</strong>s process.Other contributors are Lundvall, whose work has focused<br />
on learning in the economy, and Freeman who has concentrated his attention<br />
towards national <strong>innovation</strong> systems.<br />
The new perspective is <strong>of</strong>ten presented as the <strong>innovation</strong> system approach to<br />
economics. It stresses that <strong>innovation</strong> processes – the on-going creation and<br />
diffusion <strong>of</strong> new things and new ways <strong>of</strong> doing things – take place in a situation<br />
54
characterised by genuine uncertainty and continuous disequilibria. According<br />
to this perspective, the innovating agent does not have complete information or<br />
knowledge about, for example, available technological solutions or future<br />
technological possibilities.<br />
Learning, rather than decision making about resources allocation based on<br />
complete information, is the basis <strong>of</strong> <strong>innovation</strong> processes (Lundvall, in Kuusi<br />
(ed) 1996). Learning processes as a rule are chronologically long lasting.<br />
Therefore, the study <strong>of</strong> <strong>innovation</strong>s must have an explicit historic perspective in<br />
order to deal with the dynamics <strong>of</strong> <strong>innovation</strong>s. A strong emphasis is also<br />
placed on the fact that learning takes place in interactions between firms and<br />
other agents. Complementary knowledge is acquired through mutual learning<br />
processes. Networks <strong>of</strong> actors built on long-term, trusting relations are <strong>of</strong> great<br />
importance. Innovative firms are characterised, among other things,by the way<br />
that they competently manage their external relations. This is one <strong>of</strong> the reasons<br />
why a systems view on <strong>innovation</strong> is necessary.<br />
The <strong>innovation</strong> systems perspective also places strong emphasis on institutions,<br />
that is organisations as well as regulations, norms and habits. Institutions play a<br />
major role in determining how people relate to each other and, therefore, they<br />
determine how people interact and learn. As many institutions are not firm<br />
specific, this provides another reason why a systems view is necessary.<br />
A strength <strong>of</strong> the <strong>innovation</strong> systems perspective is its ambition <strong>of</strong> using a<br />
holistic, integrative systems approach. However, a weakness is that there is still<br />
a strong need for a more systematic theoretical basis. Traditional economics<br />
may be said to be at times overly reductionist and prone to make far-reaching<br />
simplifying assumptions in orderfor its model to be used. On the other hand,<br />
this does mean that traditional economics and developments are based on<br />
stringent theory, and are able to develop elaborate quantitative statistical<br />
models.<br />
The study <strong>of</strong> <strong>innovation</strong>s is thus multidisciplinary, including traditional<br />
economists and <strong>innovation</strong> systems researchers. The latter group in turn is<br />
composed <strong>of</strong> business academics, economic historians, sociologists and other<br />
disciplines. Major theoretical insights and antecedents can be found in the<br />
theories <strong>of</strong> evolutionary economics and <strong>of</strong> interactive learning.<br />
The role <strong>of</strong> government in theory<br />
With respect to government action there are also different approaches<br />
depending on which theoretical framework is employed. Classical economics<br />
identifies market failures relating to, for example, the lack <strong>of</strong> information or the<br />
costs to society not being reflected in market prices, and gives government a<br />
role in compensating for these failures.<br />
The <strong>innovation</strong> systems approach provides a theoretical legitimisation <strong>of</strong><br />
government action. The system failure rationale focuses on actors in a system<br />
55
and their interaction. It opens up to <strong>innovation</strong> policies that focus on the<br />
shaping <strong>of</strong> technological variety, that is, on the generation and selection<br />
mechanisms. Not only is R&D included here, but so are other policy domains<br />
such as education, competition and labour markets. Government should design<br />
an institutional system that facilitates <strong>innovation</strong> activities in firms. This<br />
ensures that there are many possible areas for initiatives. These initiatives<br />
should also be co-ordinated at the ministerial and public agency levels. Due to<br />
the complexity <strong>of</strong> <strong>innovation</strong> systems there is also a justification for policy<br />
experimentation. This in turn means that the evaluation <strong>of</strong> initiatives are<br />
necessary, to ensure policy learning and for avoiding government failure. There<br />
is no optimal <strong>innovation</strong> policy and policy-making must be based on informed<br />
use <strong>of</strong> theory, information and subjective judgement. There is a need for an<br />
adaptive policy maker, as opposed to an optimising policy maker, and policy<br />
learning as an integrated part <strong>of</strong> the policy-making process. In this approach<br />
the policy maker is not seen not as being superior to firms as knowing different<br />
things than firms (Hauknes and Norgren 1999).<br />
The <strong>innovation</strong> system approach also stresses that policy makers are not<br />
independent <strong>of</strong> the firms were <strong>innovation</strong> takes place. Rather they should be<br />
seen as actors in the system, interacting with the other actors. The multitude <strong>of</strong><br />
factors influencing innovative behaviour and the two-way relationship between<br />
policy makers and firms, means that policy instruments can not be understood<br />
in a simple stimulus response model. The stimulus and the response go both<br />
ways. Thus policy instruments should not be conceived as abstract rules<br />
imposed by government guaranteeing a specific outcome in firms, but rather as<br />
social interaction. An extreme version <strong>of</strong> this argument is presented by Kemp,<br />
“The significant choice is not among abstractly considered policy instruments<br />
but among institutionally determined ways <strong>of</strong> operating them” (Kemp,<br />
Forthcoming). Interaction between firms and policy makers takes place in both<br />
policy design and policy implementation.<br />
56
Appendix 2<br />
Environmental policy and competitiveness<br />
This appendix will try to summarise an on-going debate among researchers on<br />
the issue <strong>of</strong> whether <strong>environmental</strong> policy can strengthen a firm’s<br />
competitiveness. A central theme in this debate focuses on <strong>innovation</strong> and so<br />
we will also return to the question <strong>of</strong> whether regulation drives <strong>innovation</strong>s or<br />
not.<br />
Environmental regulation has from the viewpoint <strong>of</strong> traditional economic<br />
theory been seen as raising the cost <strong>of</strong> production. However, during the 1990s<br />
this theory has been questioned, especially by Michael E Porter and Claas van<br />
der Linde. In the discussion below we shall outline the arguments <strong>of</strong> Porter and<br />
van der Linde and present some studies that have contributed to the debate,<br />
and test what has come to be called the Porter hypothesis.<br />
The Porter Hypothesis<br />
Porter criticises the perceived wisdom that firms always seek to minimise costs<br />
and/or maximise pr<strong>of</strong>its, and that they are assumed to possess perfect<br />
information. Porter argues that the conflict between <strong>environmental</strong> protection<br />
and economic competitiveness stems from a static view <strong>of</strong> competition. Strict<br />
<strong>environmental</strong> regulations do not inevitably hinder a firm’s competitive<br />
position against its foreign rivals, but could instead enhance it. He argues that<br />
tough standards trigger <strong>innovation</strong> and upgrading (Porter, 1991).<br />
Porter also argues that the U.S. has lost in competitive performance in<br />
<strong>environmental</strong> technologies since the mid-1970s. In the same period there has<br />
been a foot-dragging in implementing <strong>environmental</strong> legislation. Other nations,<br />
such as Germany and Japan, have instituted tight <strong>environmental</strong> regulations,<br />
and appear to have a lead in the patenting and exporting <strong>of</strong> <strong>environmental</strong><br />
technology. Both countries also continue to surpass the U.S. in the rates <strong>of</strong> GNP<br />
and productivity growth. The U.S. as well as Britain has suffered, with the large<br />
majority <strong>of</strong> pollution control equipment being imported into these countries at<br />
the time <strong>of</strong> the article in 1991. In areas where the U.S. happens to have the<br />
strictest regulation, for example in pesticides, the country has a lead. Porter<br />
goes so far as to say, “the resurgence <strong>of</strong> concern to the environment, should be<br />
viewed not with alarm, but as an important step in regaining Americas preeminence<br />
in <strong>environmental</strong> technology.” The mandate for the Environmental<br />
Protection Agency should be to stimulate investment and <strong>innovation</strong>, not just to<br />
set limits (Porter, 1991).<br />
Porter and van der Linde oppose the view that <strong>environmental</strong> policy and<br />
competitiveness are negatively correlated. Environmental regulation inevitably<br />
raises costs in a static economy where technology, products and customer needs<br />
are fixed and firms make cost-minimising choices and are pr<strong>of</strong>it maximisers.<br />
According to the authors, competitive advantage rests neither on static<br />
58
efficiency nor on optimising within fixed constraints, but on the capacity for<br />
<strong>innovation</strong> and improvements that alter these constraints. Porter and van der<br />
Linde argue that properly designed <strong>environmental</strong> standards can trigger<br />
<strong>innovation</strong> that may partially or more than fully <strong>of</strong>fset the costs <strong>of</strong> complying<br />
with them. When complying, by innovatings, firms can obtain advantages over<br />
foreign firms that are not subject to similar regulations.<br />
The possibility that regulation might act as a spur to <strong>innovation</strong> arises because<br />
firms do not always make optimal choices. In reality, “the actual process <strong>of</strong><br />
dynamic competition is characterised by changing technological opportunities<br />
coupled with highly incomplete information, organisational inertia and control<br />
problems reflecting the difficulty <strong>of</strong> aligning individual, group and corporate<br />
incentives.”<br />
Porter and van der Linde argue in support <strong>of</strong> the so-called early mover<br />
advantage. They state that firms that foresee the changing world demand<br />
towards more <strong>environmental</strong>ly adapted products and production processes<br />
and adapt to this, will have a competitive advantage.<br />
As long as the regulations are designed in an appropriate way they can provide<br />
at least six advantages:<br />
1. Regulation can signal to firms areas <strong>of</strong> likely resource inefficiencies and<br />
potential technological improvements.<br />
2. Regulation focused on information gathering can achieve major benefits by<br />
rising corporate awareness.<br />
3. Regulation reduces the uncertainty that investments to address environment<br />
will be valuable.<br />
4. Regulation creates pressures motivating <strong>innovation</strong> and progress.<br />
5. Regulation levels the transitional playing field. During the transition period<br />
to <strong>innovation</strong>-based solutions, regulation ensures that one firm cannot<br />
opportunistically gain position by avoiding making <strong>environmental</strong><br />
investment.<br />
6. Regulation is needed in the case <strong>of</strong> incomplete <strong>of</strong>fsets. When <strong>innovation</strong><br />
cannot completely <strong>of</strong>fset the cost <strong>of</strong> compliance, especially in the short term,<br />
learning can reduce the cost <strong>of</strong> <strong>innovation</strong>-based solutions.<br />
Porter and van der Linde also argue that more stringent regulation, rather than<br />
lax ones, focuses firm attention on discharges and processes, and compliance<br />
requires more fundamental solutions, such as reconfiguring products and<br />
processes.<br />
According to the authors, <strong>innovation</strong> in response to <strong>environmental</strong> regulation<br />
can take two broad forms. Firstly, the firms become smarter about how to deal<br />
with pollution once it occurs. Secondly, and central to the claims that regulation<br />
59
actually can increase industrial competitiveness: at the same time as addressing<br />
<strong>environmental</strong> impacts, the <strong>innovation</strong> also improves the affected product itself<br />
and/or related processes.<br />
How should regulation be implemented to stimulate <strong>innovation</strong>?<br />
According to the Porter and van der Linde, for <strong>environmental</strong> standards to<br />
foster <strong>innovation</strong>, three principles must be attained:<br />
- They must create the maximum opportunity to <strong>innovation</strong>, leaving the<br />
approach to <strong>innovation</strong> to industry and not the standard-setting agency.<br />
- Regulation should foster continuous improvement, rather than locking in<br />
any particular technology<br />
- The regulatory process should leave as little room as possible for<br />
uncertainty at every stage.<br />
Environmental regulation should focus on outcomes, not technologies. To allow<br />
for more flexibility in <strong>innovation</strong>, the governing principle should be to regulate<br />
as late in the production chain as practical. The Environmental Protection<br />
Agency should look towards total discharges and total impacts instead <strong>of</strong> single<br />
mediums like air, water and so on. Where possible, regulation should include<br />
the use <strong>of</strong> market incentives, including pollution taxes and tradable permits.<br />
The EPA should also promote an increased use <strong>of</strong> pre-emptive standards by<br />
industry and should play a major role in collecting and then disseminating<br />
information on <strong>innovation</strong> <strong>of</strong>fsets and their consequences.<br />
The regulatory agencies could also help in creating demand pressure for<br />
<strong>environmental</strong> <strong>innovation</strong>, through for example, eco-labelling schemes.<br />
Regulatory agencies should also harness the role <strong>of</strong> government as a<br />
demanding buyer <strong>of</strong> <strong>environmental</strong> solutions and products. The authors<br />
recommend employing demonstration projects to stimulate and seed<br />
innovative new technologies, and argue that incentives for <strong>innovation</strong> must be<br />
built into the regulatory process itself. A final priority is new forums for settling<br />
regulatory issues that minimise litigation.<br />
The traditional view<br />
According to the traditional economic view, the costs <strong>of</strong> complying with<br />
<strong>environmental</strong> regulation always give rise to the lower competitiveness <strong>of</strong> firms<br />
through lowered productivity. This is based on two assumptions. Firstly, the<br />
crowding-out effect. This means that investments in, for example,<br />
<strong>environmental</strong> control equipment are made at the expense <strong>of</strong> other<br />
“productive” investments. Secondly, as the firm enjoys a lower productivity<br />
their room for manoeuvre is smaller, and this means that its cost <strong>of</strong> production<br />
are higher compared to its competitors (Marklund, 1997).<br />
Another way <strong>of</strong> analysing the connection between competitiveness and<br />
<strong>environmental</strong> policy is by arguing in terms <strong>of</strong> patterns <strong>of</strong> trade. This is based<br />
60
on the theory <strong>of</strong> terms <strong>of</strong> trade. A firm’s or country’s competitiveness is shaped<br />
by its ability to take advantage <strong>of</strong> costs lower than their competitors. Trade<br />
between two countries begins when one has a comparative advantage<br />
compared to the other. This in turn is the consequence <strong>of</strong> the fact that the<br />
countries are differently endowed in terms <strong>of</strong> their factors <strong>of</strong> production.<br />
Translated to the context <strong>of</strong> pollution and emission control, it could be argued<br />
that when a firm pollutes it is using a natural resource in the form <strong>of</strong> a clean<br />
environment. When the firm is forced to reduce the emissions it seems that it<br />
suddenly has relatively less <strong>of</strong> this resource. The firm loses all or a part <strong>of</strong> its<br />
right to pollute and, therefore, loses more or less <strong>of</strong> its competitive advantage.<br />
This results in lower exports <strong>of</strong> the products for which the environment was<br />
used as a factor <strong>of</strong> production (Marklund, 1997).<br />
Critique and attempts to test the Porter Hypothesis<br />
There have been many reactions to the articles by Porter and van der Linde.<br />
Researchers have attempted to test their ideas. Agencies and governmental staff<br />
alike have considered these new ideas to be important and <strong>of</strong> interest to policy<br />
making regardless <strong>of</strong> their verification difficulties. If there is a possibility to<br />
decouple the conflict between <strong>environmental</strong> protection and competitiveness,<br />
there is much to gain for the industry and the individual nations, the question<br />
then becomes how to make this happen.<br />
Porter and van der Linde do not, in a formal sense, test whether the hypothesis<br />
can be rejected or not. Instead they <strong>of</strong>fer examples in the form <strong>of</strong> case studies to<br />
verify the hypothesis. In part this is what the opponents <strong>of</strong> the hypothesis<br />
criticise, as the studied firms are just a fraction <strong>of</strong> the industry in question. As<br />
Palmer et al express: “It would be an easy matter for us to assemble a matching<br />
list where firms have found their costs increased and pr<strong>of</strong>its reduced as a result<br />
<strong>of</strong> <strong>environmental</strong> regulations, not to mention cases where regulation has<br />
pushed firms over the brink into bankruptcy” (Palmer et al, 1995). Jaffe and<br />
Palmer call the evidence <strong>of</strong> the case studies, provided in support <strong>of</strong> the<br />
hypothesis, “largely anecdotal”. They continue: “while these case studies<br />
indicate that <strong>environmental</strong> regulation may create incentives for <strong>innovation</strong> in<br />
certain situations, they do not provide a general assessment <strong>of</strong> the impact <strong>of</strong><br />
<strong>environmental</strong> regulation on innovative activity.”<br />
Jaffe and Palmer also argue that a more systematic economic analysis <strong>of</strong> the<br />
hypothesis is hindered by ambiguity as to exactly what the hypothesis is. One<br />
example <strong>of</strong> this ambiguity is that Porter points to the importance <strong>of</strong> regulation<br />
focusing on outcomes and not processes. Jaffe and Palmer argue that this<br />
implies that certain types <strong>of</strong> <strong>environmental</strong> regulation stimulate <strong>innovation</strong>, but<br />
other types do not. Unfortunately, they write, almost all <strong>of</strong> the existing U.S.<br />
<strong>environmental</strong> legislation is not <strong>of</strong> the type prescribed by Porter but rather it is<br />
setting both the goals <strong>of</strong> regulation and the processes for achieving those<br />
61
goals 15 . Thus, Porter's case studies do not provide us with any evidence about<br />
the empirical implications <strong>of</strong> existing regulation. Another interpretation <strong>of</strong> the<br />
hypothesis is that Porter assumes <strong>environmental</strong> regulation to be a free, or even<br />
paid, lunch. By this Jaffe and Palmer mean that “regulation induces <strong>innovation</strong><br />
whose benefits exceed its costs, making the regulation socially desirable even<br />
ignoring the <strong>environmental</strong> problems it was designed to solve.”<br />
The authors also discuss the problems <strong>of</strong> systematically testing the model <strong>of</strong><br />
Porter, due to the limitations <strong>of</strong> data. It would have been a problem even if the<br />
model had been specified more precisely. The only comprehensive measure <strong>of</strong><br />
the <strong>environmental</strong> regulatory burden on industry is regulatory compliance<br />
expenditure, they argue. This fails to provide a truly exogenous measure <strong>of</strong> the<br />
regulatory burden because the cost level also depends on the nature <strong>of</strong> an<br />
industry’s response to regulation. Porter suggests that a firm’s response to<br />
stricter regulation are fundamental changes <strong>of</strong> its products or processes to make<br />
them more “green”. But these changes are unlikely to be reflected to any<br />
significant extent in published industry output measures.<br />
Jaffe and Palmer review the literature on <strong>environmental</strong> regulation and R&D<br />
and note that almost all existing literature is theoretical in nature. A large<br />
subset <strong>of</strong> this literature centres its interest on the incentives a firm confronts to<br />
undertake R&D to reduce <strong>environmental</strong> compliance costs, or to reduce<br />
pollution, under different approaches to <strong>environmental</strong> regulation. 16 In general<br />
these studies come to the conclusion that incentives for R&D tend to be stronger<br />
under <strong>environmental</strong> policies that are incentive-based rather than under<br />
command and control policies.<br />
The authors also discuss research which studies the relationship between<br />
stringency <strong>of</strong> <strong>environmental</strong> regulation and incentives for R&D and technology<br />
diffusion. Oates, Palmer and Portney 17 use a simple model <strong>of</strong> a pr<strong>of</strong>itmaximising<br />
firm in a perfectly competitive industry to show that increasing the<br />
pollution tax rate increases the firm’s incentive to adopt a more efficient<br />
abatement technology. Schmalensee argues that stricter <strong>environmental</strong><br />
15 Jaffe and Palmer discuss that ”Strictly speaking <strong>environmental</strong> regulation rarely require polluters to<br />
employ a particular pollution control technology. However, since emissions standards are <strong>of</strong>ten based on<br />
the performance <strong>of</strong> a particular technology, regulated firms have an easier time obtaining <strong>environmental</strong><br />
permits and may be less heavily scrutinised when they employ the technology that provides the basis for<br />
the standard.”<br />
16 Zerbe, R. 1970 ”Theoretical Efficiency in Pollution Control,” Western Economic Journal 8: 364-376<br />
Downing P.B. and L.J. White.1986. ”Innovation in Pollution Control”, Journal <strong>of</strong> Environmental Economics<br />
and Management 8: 225-271<br />
Milliman, S.R. and Prince, R. 1989. ”Firm Incentives to Promote Technological Change in Pollution<br />
Control,” Journal <strong>of</strong> Environmental Economics and Management 17: 247-265.<br />
17 Oates, W.E., Palmer, K. and Portney, P.R.. 1993. ”Environmental Regulation and International<br />
Competitiveness: Thinking about the Porter Hypotheses”, RFF Discussion Paper 94-02, (Washington,DC:<br />
Resources for the Future).<br />
62
egulation may lead to increases in R&D devoted to <strong>environmental</strong> compliance,<br />
but that the research increases are likely to come at the expense <strong>of</strong> other, maybe<br />
more pr<strong>of</strong>itable, research efforts. 18 McCains argues that if firms forecast that<br />
any resulting gains in the efficiency <strong>of</strong> pollution control could lead to a<br />
tightening <strong>of</strong> regulatory standards, regulated firms may be reluctant to<br />
innovate or to adopt efficient pollution control technologies. 19 The firm’s<br />
incentives can also change in nature if the firm is placed within the context <strong>of</strong> an<br />
imperfect competitive market, and if other regulatory claims are imposed.<br />
Biglaiser and Horowitz explicitly model strategic interactions among regulated<br />
firms in the research market. They show that, given a requirement that the<br />
more inefficient firms adopt one <strong>of</strong> the newly developed efficient technologies<br />
after it becomes available, an increase in the emission tax rate will decrease the<br />
level <strong>of</strong> aggregate research. Lanjouw and Mody found that increases in<br />
<strong>environmental</strong> compliance costs led to increases in patenting <strong>of</strong> new<br />
<strong>environmental</strong> technologies with a one to two year lag. 20 Thus these authors<br />
support one version <strong>of</strong> the Porter hypothesis as interpreted by Jaffe and Palmer,<br />
namely that regulation stimulates certain kinds <strong>of</strong> <strong>innovation</strong>. The authors also<br />
refer to several econometric studies that suggest that <strong>environmental</strong> regulation<br />
has a negative impact on productivity growth.<br />
The results <strong>of</strong> a study by Jaffe and Palmer indicate that when the compliance<br />
expenditure within an industry increases, there is an associated increase in<br />
R&D shortly afterwards. However, the authors found little evidence that the<br />
inventive output <strong>of</strong> an industry, as measured by successful patent applications,<br />
was related to compliance costs.<br />
These results do not <strong>of</strong>fer any substantial insight into the different<br />
interpretations <strong>of</strong> the Porter hypothesis. However, the findings are consistent<br />
with the hypothesis that <strong>environmental</strong> regulation will stimulate certain types <strong>of</strong><br />
<strong>innovation</strong>. Mody and Lanjouv found that regulatory compliance costs have a<br />
positive effect on patenting <strong>of</strong> <strong>environmental</strong> technologies. Taken together<br />
these studies suggest that, the disincentive for R&D attributed to commandand-control<br />
approaches to <strong>environmental</strong> regulation may be overcome by the<br />
high returns that regulation creates for new pollution-control techniques.<br />
According to another survey <strong>of</strong> a different set <strong>of</strong> literature, which among other<br />
things did study the Porter hypothesis (Marklund, 1997), it is hard to find<br />
theoretical support for Porter’s arguments. The strongest argument against it is<br />
18 Schmalensee, R., 1994. ”The Costs <strong>of</strong> Environmental Protection” in Balancing Economic Growth and<br />
Environmental Goals”, Mary Beth Kotowski, ed., American Council for Capital Formation Center for Policy<br />
Research, pp 55-75<br />
19 Mc Cain. 1978. ”Endogenous Bias in Technical Progress and Environmental Policy” American<br />
Economic Review 68: 538-46<br />
20 Lanjouw, J.O. and Mody, A. 1993. ”Stimulating Innovation and the International Diffusion <strong>of</strong><br />
Environmentally Responsive Technology: The Role <strong>of</strong> Expenditures and Institutions,” mimeo.<br />
63
that firm’s voluntarily can choose to make the investments and the emission<br />
reduction that is given by Porter’s reasoning. The fact that they do not choose to<br />
do so tells us that they do not assume these investments to be pr<strong>of</strong>itable. Even if<br />
there were pr<strong>of</strong>its to be made, it is no pro<strong>of</strong> that it is <strong>environmental</strong> investments<br />
that are the best way to realise these pr<strong>of</strong>its. Marklund also argues that Porter’s<br />
argument, that <strong>environmental</strong> regulation forces the firms to seek more efficient<br />
solutions, is not without its problems. All firms strive continuously to make<br />
such improvements and <strong>environmental</strong> investments crowd out other<br />
investments, which could have given higher productivity gains.<br />
On the other hand it is hard, if not impossible, to fully reject Porter’s ideas from<br />
theory alone. The empirical literature on the subject can, in a very minor way,<br />
be used to verify Porter’s ideas. However, Marklund concludes that results<br />
from American studies show that the productivity loss in the later half <strong>of</strong> the<br />
1970s could only to a very restricted extent be the result <strong>of</strong> more stringent<br />
<strong>environmental</strong> regulation. Scandinavian studies show mostly the same results.<br />
The development <strong>of</strong> productivity seems to be independent <strong>of</strong> the<br />
<strong>environmental</strong> policy.<br />
Scandinavian studies on plant level are interesting because they connect to the<br />
Porter hypothesis in a more direct way than other studies do. But the results<br />
from these studies are ambiguous. A Norwegian study shows that firms, which<br />
are subject to the strongest <strong>environmental</strong> regulations in the pulp and paper<br />
and the iron and steel industries, have a higher frequency <strong>of</strong> employment and<br />
have been less inclined to be shut down plants, compared to other firms.<br />
However, studies <strong>of</strong> Swedish and Finnish forest industry show that the firms<br />
find pollution reduction to be associated with higher costs. The Finnish study<br />
also shows a negative correlation between regulation pressure and efficiency.<br />
A reason for the weak conclusion is, according to Marklund, that among the<br />
empirical literature there are very few studies that test the ideas <strong>of</strong> Porter<br />
directly. The empirical literature is traditional in the sense that they are<br />
grounded on traditional economic theory, for example, from the assumption <strong>of</strong><br />
pr<strong>of</strong>it maximisation or cost minimisation and firms with perfect information.<br />
However, that is exactly what Porter objects to. His hypothesis stems from the<br />
assumption that firms do not have perfect information and that they can have<br />
goals other than maximising pr<strong>of</strong>its. Marklund points to that serious tests <strong>of</strong><br />
Porters ideas must emanate from frames <strong>of</strong> reference other than the traditional<br />
ones (Marklund, 1997).<br />
A recent study by Xepapadeas and de Zeeuw, 1999, on the ideas <strong>of</strong> Porter and<br />
van der Linde attempts to explore the validity <strong>of</strong> the hypothesis. The study<br />
includes firm’s reactions with respect to both the type and the quantity <strong>of</strong><br />
equipment in which they invest in response to changes in production costs. The<br />
results showed that an increase in production costs, brought about by<br />
<strong>environmental</strong> policy, triggers a restructuring <strong>of</strong> the capital stock so that the<br />
64
average productivity increases. This is in line with the hypothesis. However,<br />
the authors are interested in the development <strong>of</strong> net pr<strong>of</strong>its and come to the<br />
conclusion that the trade-<strong>of</strong>f between <strong>environmental</strong> conditions and pr<strong>of</strong>its <strong>of</strong><br />
the home industry remains opposed to the hypothesis. But the trade-<strong>of</strong>f is less<br />
sharp because <strong>of</strong> industry downsizing and modernisation (Xepapadeas and de<br />
Zeeuw, 1999).<br />
Defence arguments<br />
Porter and van der Linde themselves answer some <strong>of</strong> the critics <strong>of</strong> the earlier<br />
argument, that strict <strong>environmental</strong> regulation can be fully consistent with<br />
competitiveness, in their article from 1995. One criticism was that while<br />
<strong>innovation</strong> <strong>of</strong>fsets are theoretically possible, they are likely to be rare or small in<br />
practice. Porter and van der Linde disagree and argue that fundamentally<br />
pollution is a manifestation <strong>of</strong> economic waste and involves unnecessary,<br />
inefficient or incomplete utilisation <strong>of</strong> resources, or resources that are not used<br />
to generate their highest value. In many cases, emissions are a sign <strong>of</strong><br />
inefficiency and force a firm to perform non-value-creating activities such as<br />
handling, storage and disposal. Along the life cycle <strong>of</strong> the product there are<br />
many hidden costs <strong>of</strong> resource inefficiency. They point to efforts to reduce<br />
pollution and maximise pr<strong>of</strong>its share the same basic principles, including the<br />
efficient use <strong>of</strong> inputs, substitute <strong>of</strong> less expensive materials and the<br />
minimisation <strong>of</strong> unneeded activities (Porter and van der Linde, 1995).<br />
Another criticism <strong>of</strong> the hypothesis was, according to Porter and van der Linde,<br />
that the studies interpret the high costs <strong>of</strong> compliance with <strong>environmental</strong><br />
regulations, as evidence that there is a fixed trade-<strong>of</strong>f between regulation and<br />
competitiveness. Porter and van der Linde answer that estimates <strong>of</strong> regulatory<br />
compliance costs prior to enactment <strong>of</strong> a new rule typically exceed the actual<br />
costs. Also early estimates <strong>of</strong> compliance cost tend to be exaggerated because<br />
they assume no <strong>innovation</strong>. A third criticism was that even if regulation fosters<br />
<strong>innovation</strong>, it will harm competitiveness by crowding out other potentially<br />
more productive investments. The authors write that many firms have, given<br />
incomplete information, devoted limited attention to <strong>environmental</strong><br />
<strong>innovation</strong>s and the inherent linkage between pollution and resource<br />
productivity. It is, therefore, certainly not obvious that this line <strong>of</strong> <strong>innovation</strong><br />
has been so thoroughly explored that the marginal benefits <strong>of</strong> further<br />
investment would be low (Porter and van der Linde, 1995).<br />
Comments<br />
The conclusion made by Marklund, that Porter’s ideas must be tested within<br />
frames <strong>of</strong> reference other than the ones usually used by economists illustrates<br />
the difficulties <strong>of</strong> studying <strong>innovation</strong>s within standard economics frameworks.<br />
Investing in <strong>innovation</strong>s differs from routine investments in a number <strong>of</strong> ways.<br />
Routine investments are made to increase or change production in a foreseeable<br />
65
manner. There is readily available knowledge as to the outcome and the cost <strong>of</strong><br />
investing when the investment decision is made. When investing in innovative<br />
efforts neither the outcome nor the cost is known beforehand. Not even the risk<br />
<strong>of</strong> the assessment may be easily judged. Therefore, it is not obvious how costs<br />
should be minimised in the best way, nor what constitutes the most costefficient<br />
decision. Innovative efforts are genuinely risky ventures that may or<br />
may not increase competitiveness. It is most difficult to compare alternative<br />
strategies, even after the innovative venture is carried through. Innovations are<br />
inherently unique and there is no way to measure their cost-effectiveness.<br />
Therefore, there is no point in assessing how regulations affect their costeffectiveness.<br />
It is, however, reasonable to believe that <strong>innovation</strong>s contribute substantially to<br />
competitive advantage, and to the extent that regulations stimulate <strong>innovation</strong>s<br />
they may contribute to competitiveness.<br />
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