The international economics of resources and resource ... - Index of

Int Econ Econ Policy (2010) 7:147–151 

DOI 10.1007/s10368-010-0172-x 

INTRODUCTION 

The international economics of resources 

and resource policy 

Raimund Bleischwitz & Paul J. J. Welfens & 

ZhongXiang Zhang 

Published online: 25 July 2010 

# Springer-Verlag 2010 

Resource Economics is a neglected field of International Economics despite the fact that 

there has been a long debate about the role of energy and economic growth as well as 

about the pricing of non-renewables. Both exploration of (non-renewable) natural 

resources and their use can generate negative national and international external effects 

and at the same time, the positive external effects of innovation projects may also be 

considered in the field of resource-saving technological progress; while process 

innovations, product innovations and setting ambitious standards could be major elements 

of green innovativeness and sustainability provided that governments and international 

organizations set the incentives right. However, this broader sustainability perspective has 

not been taken. As indicated by the current prevailing approach to controlling CO2 

emissions in the international political system, little attention is paid to global green 

innovation dynamics despite the fact that international positive external effects are 

crucial here. 

In the Copenhagen Climate Change Conference, it has turned out that the OECD 

countries and China and other leading newly industrialized countries could not agree on 

joint strategies for fighting global warming; the US and China were unable to bridge the 

already existing analytical and political gap between western European countries and the 

The papers for this special issue were originally contributed to the 2nd International Wuppertal 

Colloquium on “Sustainable Growth, Resource Productivity and Sustainable Industrial Policy - Recent 

Findings, new Approaches for Strategies and Policies” that was held from 10 to 12 September 2009 in 

Wuppertal, Germany. The intensive discussion during the Colloqium and the subsequent rigorous review 

process have helped to facilitate this process - we wish to thank all participants and contributers, as well as 

Sevan Hambarsoomian and Deniz Erdem for administrative support. 

R. Bleischwitz (*) 

Wuppertal Institute, P.O. Box 100480, D-42004 Wuppertal, Germany 

e-mail: raimund.bleischwitz@wupperinst.org 

P. J. J. Welfens 

European Institute for International Economic Relations, University of Wuppertal, Wuppertal, 

Germany 

Z. Zhang 

Research Program, East-West Center, 1601 East-West Road, Honolulu, HI 96848-1601, USA

148 R. Bleischwitz et al. 

US. The Conference had called for deep emission cuts with a view to reducing global 

emissions and for mitigation goals from all major countries/country groups, as well as 

China, whose rapidly growing economy has made it a world economy leader while its 

partly inward-looking political elite has hardly developed broader concepts of joint 

international responsibility and joint international leadership. Climate change in a 

conventional sense has topped the international policy agenda since the Kyoto Protocol 

was signed by most OECD countries; the USA did not come on board, fearing, among 

other reasons, that its economic growth could be impaired. 

There is a broad sustainability debate in the world economy in which actors from both 

OECD countries and newly industrialized countries actively participate (Bleischwitz et al. 

2009). While economic growth remains an important policy goal in all countries, the 

Transatlantic Financial Market Crisis has undermined the stability of the Western market 

economies and the shortsightedness observed in financial markets raises new issues for 

the broader sustainability debate. Can we achieve environmental sustainability under 

conditions in which financial market participants have few incentives to think long term 

and in which new uncertainties undermine the stability of OECD countries (Welfens 

2010)? 

Climate change has turned out to become such an important issue that negotiating a 

new agreement to succeed the Kyoto Protocol is being faced with many—probably too 

many—expectations. As has been witnessed at the recent Copenhagen Climate Change 

Conference, which aimed to hammer out a post-2012 global agreement on climate 

change, the Europeans had hoped for a legally binding agreement with targets and 

timetables for the reduction of greenhouse gases, whereas other countries, notably the 

USA and China, have stressed the importance of international trade, growth and recovery 

after the turmoil of the financial crisis, and development rights. The Asia-Pacific 

Economic Conference Summit in Singapore in November 2009 had, to a large extent, 

paved the way for what is now called the “Copenhagen Accord” on climate change—a 

relatively toothless document without any new binding emission targets as seen by many 

Europeans, and a very small step forward towards solving important issues such as 

financing, deforestation and adaptation as seen from another angle, perhaps in an entirely 

new international architecture as proposed by Olmstead and Stavins (2009). 

As argued in Zhang (2009), international climate negotiations for an immediate post- 

2012 global climate regime should not attempt unrealistic goals. Without all of the 

factors, discussed in Zhang (2009), being met for a legally binding global agreement, 

the Copenhagen Accord is probably the best that could be achieved. The situation could 

be worse because the negotiations could have completely collapsed. Looking back, it 

seems justified to characterize these international negotiations as “systems overload”— 

an attempt to address too many issues within a system that is constrained by diplomacy, 

passions and interests (this is the view of Thomas Kleine-Brockhoff in his “Copenhagen 

lessons” in the FT of December 2009). 

This special issue of International Economics and Economic Policy seeks to analyze 

the underlying issue of green growth from a slightly different angle, called “resource 

policy”. Our understanding of the latter is a policy that seeks to enhance the sustainability 

of using resources along their full life cycle from extraction to transformation into 

materials and production, transportation, consumption onto recycling and disposal. 

There are some obvious advantages in doing so, and a few other aspects that may 

deserve an explanation. Starting with the synergies between climate change and the use of

The international economics of resources and resource policy 149 

natural resources, it is clear that a key abatement strategy, such as energy efficiency, is not 

just mirrored by attempts to use materials more efficiently. Using materials more 

efficiently also potentially allows for grasping more opportunities to save energy along the 

whole value chain, to save material purchasing costs and to enhance competitiveness 

(Aldersgate Group 2010; Bringezu and Bleischwitz 2009). 

In a broader context, fossil fuels are but one natural resource that is used in societies 

worldwide. All potential substitutes such as biofuels and renewable energies depend upon 

natural resources such as land, steel and platinum. Providing these natural resources in a 

most sustainable manner will thus become a key strategy for climate change mitigation as 

well as for green growth. How industry and economies take up these challenges will 

become a major issue for economic research. 

International commodity markets provide important signals on using natural 

resources to economic actors. After a relatively long period of surging commodity 

prices, the financial crisis marked a break in 2008. However, after a sharp decline in 

early 2009 the commodity prices have again started to rise and are now back at a 

level that is higher than in the nineties of the last century. Analyzing the dynamics of 

these markets, be it for oil, raw materials or for secondary materials, as well as 

potential leakage effects that result from low regulatory environmental standards, 

will deserve more attention from international economics in the coming years. 

Moreover, given the weak state of forecasting in that area—yet, there is no 

international agency with a mandate to develop a comprehensive set of scenarios on 

future materials markets—and acknowledging a lack of awareness for material 

efficiency as pointed out by Rennings and Rammer (2009), a well-spring of new 

research can be expected on current drivers for resource use and how actors and 

economies will use natural resources, energy and materials in the future. 

Material Flow Analysis (MFA) was created a few years ago as an attempt to analyze 

the use of natural resources in societies. It is associated with concepts such as ‘industrial 

ecology’ and ‘socio-industrial metabolisms’ 1 —and may not yet have fully explored the 

economic dimension of material flows. Integrating the stages of production, 

consumption and recycling, it goes beyond traditional resource economics and offers 

a comprehensive perspective for resource policy. Since Eurostat and OECD have 

provided handbooks on the measurement of material flows, and do in fact promote the 

collection of data and applying concepts, there are many opportunities for 

international economics and economic policy to integrate MFA in their models and 

empirical analysis. 

Recalling the issue of green growth and innovation, this special issue seeks to explore 

a new category of innovation that can be characterized as “material flow innovation” 

(see the paper written by Bleischwitz in this issue). While the established categories of 

process, product and system innovation (as well as organizational and advertising 

innovation, see e.g. the OECD Oslo Manual on Innovation) have their merits, the claim 

can be made that given the pervasive use of resources across all stages of production and 

consumption, a new category will have to be established to capture the various new 

innovation activities ahead. 

1 

See e.g. the web pages of the International Society for Industrial Ecology: www.is4ie.org and www. 

materialflows.net on data.

150 R. Bleischwitz et al. 

Such a perspective for innovation and green growth is also combined with that on 

lead markets for material efficiency, bio-based products and resource productivity 

worldwide. In distinction to climate change diplomacy, where it is difficult to engage the 

emerging economies, our perspective sheds light on attractive lead markets in emerging 

economies because they can build upon advantages in natural endowments and allow 

for the establishment of new development pathways. 

The scope of this special issue follows the debate as outlined above. 

The international sustainability discussion has focused greatly on CO 2 emission 

reductions but this focus is rather narrow and not really adequate when the long-run 

sustainability dynamics are to be assessed. The broader role of green innovativeness 

has to be considered as well. Aimed for a broader innovation-oriented sustainability, 

Welfens, Perret and Erdem have developed the Global Sustainability Indicator. The 

new indicator set is in line with OECD recommendations for composite indicators and 

uses weights from factor analysis. Reflecting environmental pressures, economic 

performance and capabilities for eco-technologies, the Global Sustainability Indicator 

shows a compact way of assessing global sustainability. Illustrating the outcomes on a 

global scale, their paper also addresses the relevance of the policy. 

Lucas Bretschger gives an overview on sustainability economics and sheds light on the 

nexus between using resources and economic performance from both a theoretical and an 

empirical perspective. Furthermore, the paper addresses a possible “Green New Deal” that 

would help boost investments into eco-innovation. 

ZhongXiang Zhang analyzes trade policy implications of the proposed carbon tariffs in 

the U.S., as well as China’s responses to it. Scrutinizing the emissions allowance 

requirements proposed in the U.S. congressional climate bills against WTO provisions 

and case laws, his paper recommends what is to be done on the side of the U.S. to 

minimize the potential conflicts with WTO provisions in designing its border carbon 

adjustment measures, and provides suggestions for China on how to deal with its 

advantage effectively while being targeted by such proposed measures. 

Raimund Bleischwitz analyzes why a concern about natural resources requires a 

sustainability perspective and compares resource productivity performances across 

countries. Introducing the notion of ‘material flow innovation’, he discusses the 

innovation dynamics and issues of competitiveness. In the paper he also makes a case 

for effective resource policies that should provide incentives for knowledge generation 

and to get prices right. 

Rainer Walz discusses competences for green development and leapfrogging in Newly 

Industrializing Countries (NICs). His empirical analysis shows diverging competences 

innovation patterns across NICs, though in general, the eco-innovation performance is 

impressive and supports the lead market hypothesis. 

Paul Ekins discusses concepts, policies and the political economy of system innovation 

for environmental sustainability. His paper supports a strong role in policy and also 

advocates the role of the law, in a policy mix with the undoubtable success of the 

economic incentives. 

René Kemp analyzes the innovative Dutch Energy Transition approach, which is 

characterized by dialogues and cooperation among actors rather than a top-down policy. 

Explaining how it has worked in the past and what theories support the transition 

approach, the paper makes an interim assessment and discusses implications for a policy 

mix.

The international economics of resources and resource policy 151 

Frank Beckenbach takes a dynamic system perspective and presents findings from an 

agent-based, multi-level approach on innovation, growth and mitigating emission 

impacts. His simulation reveals the time dependency of incentives and the usefulness of 

target group-specific approaches. 

Christian Lutz also presents findings from a modeling exercise. Using the dynamic 

input–output model GINFORS, the paper reveals the economic impacts of reducing CO2 

emissions and increasing resource productivity in the EU. The results show a positive 

impact on emissions and employment, though a slightly lower GDP growth compared 

to business in usual scenarios. 

Tomoo Machiba introduces the OECD’s work on green growth and the underlying 

analytical approach; furthermore, the paper discusses new policy crossroads after the 

financial crisis. 

From the analysis of the underlying issues, it is clear that Resource Economics, 

International Economics and Policy Analysis should be linked more closely in the 

future. For a future research agenda empirical findings should be included on green 

innovativeness, as well as on the progress in the field of resource efficiency. 

Moreover, there is also great need to get more empirical studies on the issue of 

external effects of production, consumption and waste disposal. 

References 

Aldersgate Group (2010) Beyond Carbon: towards a resource efficient future, London 

Bleischwitz R, Welfens PJJ, Zhang ZX (eds) (2009) Sustainable growth and resource productivity: 

economic and global policy issues. Greenleaf Publisher, Sheffield 

Bringezu S (2009) Visions of a sustainable resource use. In: Bringezu S, Bleischwitz R (eds) Sustainable 

resource management. Trends, visions and policies for Europe and the world. Greenleaf Publisher, 

pp 155–215 

Bringezu S, Bleischwitz R (eds) (2009) Sustainable resource management. Trends, visions and policies for 

Europe and the World. Greenleaf Publisher 

OECD (2008) Measuring material flows and resource productivity. Vol. I–III and a Synthesis report. 

Organisation for Economic Development and Cooperation, Paris 

Olmstead S, Stavins R (2009) An expanded three-part architecture for post-2012 international climate 

policy, The Harvard Project on International Climate Agreements, www.belfercenter.org/climate 

Rennings K, Rammer C (2009) Increasing energy and resource efficiency through innovation—an 

explorative analysis using innovation survey data. ZEW discussion paper No. 09-056 

Welfens PJJ (2010) Transatlantic baking crisis: analysis, rating, policy. Int Economics and Economic 

Policy 7:3–48 

Zhang ZX (2009) How far can developing country commitments go in an immediate post-2012 climate 

regime? Energy Policy 37:1753–1757


DOI 10.1007/s10368-010-0165-9 

ORIGINAL PAPER 

Global economic sustainability indicator: analysis 

and policy options for the Copenhagen process 

Paul J. J. Welfens & Jens K. Perret & Deniz Erdem 

Published online: 2 July 2010 


Abstract The traditional discussion about CO2 emissions and greenhouse gases as a 

source of global warming has been rather static, namely in the sense that innovation 

dynamics have not been considered much. Given the global nature of the climate 

problem, it is natural to develop a more dynamic Schumpeterian perspective and to 

emphasize a broader international analysis, which takes innovation dynamics and green 

international competitiveness into account: We discuss key issues of developing a 

consistent global sustainability indicator, which should cover the crucial dimensions of 

sustainability in a simple and straightforward way. The basic elements presented here 

concern genuine savings rates—covering not only depreciations on capital, but on the 

natural capital as well—, the international competitiveness of the respective country in 

the field of environmental (“green”) goods and the share of renewable energy 

generation. International benchmarking can thus be encouraged and opportunities 

emphasized—an approach developed here. This new EIIW-vita Global Sustainability 

Indicator is consistent with the recent OECD requirements on composite indicators and 

thus, we suggest new options for policymakers. The US and Indonesia have suffered 

from a decline in their performance in the period 2000–07; Germany has improved its 

performance as judged by the new composite indicator whose weights are determined 

from factor analysis. The countries covered stand for roughly 91% of world GDP, 94% 

of global exports, 82% of global CO2 emissions and 68% of the population. 

We appreciate the technical support and the comments by Samir Kadiric, Peter Bartelmus, New York, 

Columbia University and ZhongXiang Zhang, Honolulu; editorial assistance by Michael Agner, University of 

Odense and Lilla Voros (EIIW) are also appreciated. This research has benefited from financial support from 

vita foundation, Oberursel. 

Prof. P.J.J. Welfens, Jean Monnet Professor for European Economic Integration; chair for Macroeconomics; 

president of the European Institute for International Economic Relations at the University of Wuppertal; Research 

Fellow, IZA, Bonn; Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC. 

P. J. J. Welfens : J. K. Perret: D. Erdem 

European Institute for International Economic Relations, EIIW, University of Wuppertal, 

Rainer-Gruenter-Str. 21, 42119 Wuppertal, Germany 

P. J. J. Welfens (*) 

University of Wuppertal, Rainer-Gruenter-Str. 21, 42119 Wuppertal, Germany 

e-mail: welfens@eiiw.uni-wuppertal.de 

URL: www.eiiw.eu 

URL: www.econ-international.net

154 P.J.J. Welfens et al. 

Keywords Global warming . Innovation . Sustainability . International Economics . 

Factor analysis 

1 Introduction 

In the post-Kyoto process, it will be very important to face the global climate challenge 

on a broad scale: simply focusing on the OECD countries would not only imply the 

restriction of attention to a group of countries, which around 2010 will be responsible 

for less than 50% of global greenhouse gas emissions; it would also mean to ignore the 

enormous economic and political potential which could be mobilized within a more 

global cooperation framework. The Copenhagen Summit 2009 will effectively set a 

new agenda for long-term climate policy, where many observers expect commitments 

to not only come from EU countries, Australia, Japan and Russia, but also from the 

USA and big countries with modest per capita income, such as China and India. The 

ambitious goals envisaged for long-term reduction of greenhouse gases will require 

new efforts in many fields, including innovation policy and energy policy. If one is to 

achieve these goals, major energy producers such as the US, Russia, Indonesia and the 

traditional OPEC countries should be part of broader cooperation efforts, which could 

focus on sustainability issues within a rather general framework: 

& Sustainable development, in the sense that the national and global resource 

efficiency strongly increases over time, so that future generations have equal 

opportunities, as present generations, in striving for a high living standard, 

& Sustainable investment dynamics in the sense that investment in the energy 

sector should be long term—given the nature of the complex extraction and 

production process in the oil and gas sector and in the renewable sector as well 

(not to mention atomic energy, where nuclear waste stands for very long-term 

challenges); investment dynamics will be rather smooth when both major supplyside 

disruptions and sharp price shocks can be avoided. The current high volatility of 

oil prices and gas prices—with both prices linked to each other through some 

doubtful formula and international agreements—is largely due to instabilities in 

financial markets: Portfolio investors consider investment in oil and gas—in the 

respective part of the real sector in some cases, in many cases, simply into the 

relevant financial assets—as one element of a broader portfolio decision process, 

which puts the focus on a wide range of assets, including natural resources, 

& Sustainable financial market development: If one could not achieve more longterm 

decision horizons in the banking sector and the financial sector, 

respectively, it would be quite difficult to achieve rather stable long-term growth 

(minor cyclical changes are, of course, no problem for the development of the 

energy sector). With more and more countries facing negative spillovers from the 

US banking crisis, more and more countries will become more interested in more 

stability in global financial markets. At the same time, one may not omit the fact 

that emission certificate trading systems established in the EU have created a 

new financial market niche of their own. With more countries joining 

international Emission Trading Schemes (ETS approaches), the potential role 

of financial markets for the world’s efforts in coping with climate policy challenges

Global economic sustainability indicator 155 

will become more important over time. It may also be noted that stable financial 

markets are required for financing investment and innovation in the energy sector. 

From this perspective, overcoming the international banking crisis is of paramount 

importance, however, the progress achieved within the G20 framework is rather 

modest—not the least because there is still weak regulation for big banks (for 

which, the problem of too big to fail is relevant) and because more competition, as 

well as better risk management, has been hardly achieved in 2009; transparency is 

still lacking, not the least because the IMF has not yet published the Financial 

Sector Assessment Program for the US, which is now overdue for many years. 

Without more stability in financial markets and banks, there is considerable risk 

that the creation of new financial instruments associated with emission trading will 

simply amount to creating a new field of doubtful speculation activities with 

massive negative international external effects. 

Sustainability so far has not been a major element of economic policy in most 

OECD countries and in major oil exporters and gas exporters, although sustainability 

policy may be considered to be a key element of long-term economic and ecological 

modernization; sustainability implies a long-term perspective and such a perspective is 

typical of the oil and gas industry. The use of fossil fuels, in turn, is of key importance 

for climate change and sustainable development, respectively—and the use of such 

primary energy sources in turn causes CO2 emissions. In contrast to general 

discussions in the international community, which typically puts the focus on CO2 

emissions per unit of GDP (or per capita), it is adequate to consider CO2 emissions 

per unit of GDP at purchasing power parities (PPP); otherwise, there would be a 

crucial bias in the comparison of CO 2 emission intensities. The PPP figures look 

quite different from the emission intensities based on nominal $ GDP per capita data; 

e.g., China’s performance on a PPP basis is not much worse than that of Poland. 

Greenhouse gas emissions, toxic discharges in industrial production and 

deforestation are among the key aspects of global environmental problems. Longterm 

economic growth in the world economy will intensify certain problems; at the 

same time, growth is coupled with technological progress, which in turn could allow 

for a decoupling of economic growth and emissions. It is not clear to which extent 

countries and companies contribute to solving environmental problems, although 

some countries—e.g., Germany, Switzerland and Austria—claim that exports in 

environmental products strongly contribute to overall exports and also to the creation 

of new jobs (Sprenger 1999). 

While certain fields of environmental problems have seen some improvement 

over the past decades—e.g., the quality of water in many rivers within Europe 

improved in the last quarter of the 20th century—, other challenges have not really 

found a convincing solution. In the EU, the European Environmental Agency (2008) 

reports on various fields of economic improvement. The BP report (2009) also 

presents progress in a specific field, namely the reduction of CO 2 emission per capita 

in OECD countries. The global picture is different, however. Greenhouse gases have 

increased over time, and while emission trading in the EU has made considerable 

progress, the global dynamics of CO2 and other greenhouse gases have been strong. 

While global political interest in sustainability issues has increased over time, the 

recent transatlantic financial market crisis has undermined the focus on sustainable


development. It is also fairly obvious that financial markets shaped by relatively 

short-term decision horizons—and short-term oriented bonus schemes—are undermining 

the broader topic of sustainability. It is difficult to embark on more long-term 

sustainable strategies in companies and households, if both banks and fund managers 

mainly emphasize short- and medium-term strategies. 

For the first time, energy consumption and greenhouse gas emissions were larger 

outside the OECD than in the OECD countries in 2008. This partly reflects the 

dynamics of successful economic globalization, namely that countries such as China, 

India, Indonesia, Brazil, etc. have achieved high, long term growth, which goes 

along with rising emissions. Economic globalization has several other aspects, 

including: 

& Enhanced locational competition which reinforces the interest in foreign direct 

investment and multinational companies. 

& Higher global economic growth (disregarding here the serious short-term adverse 

effects of the transatlantic financial crisis and the world recession) which 

correspond with stronger competition and a broader international division of 

labor on the one hand, and with potentially fast rising emissions and growing 

trade in toxic waste on the other. 

& Fast growth of transportation services and hence of transportation related 

emissions which particularly could add to higher CO2 emissions. 

From a policy perspective, it is useful to have a comprehensive assessment of the 

pressure on the environment. Several indicators have been developed in the 

literature, which give a broader picture of the environmental situation. The EU has 

emphasized the need to look not only at GDP but at broader measures for measuring 

progress (European Commission 2009). 

Most sustainability indicators are mainly quantitative (e.g., material flow analysis, 

MFA) which to some extent is useful for assessing the ecological burden of the 

production of certain goods and activities. Total Material Requirement is an 

interesting indicator when it comes to measuring resource productivity since it 

considers all materials used for a certain product, including indirect material input 

requirements associated with intermediate imports. A very broad indicator concept— 

with dozens of sub-indicators—has been developed by researchers at Yale 

University and Columbia University (Yale/Columbia 2005) which derive very 

complex indicators for which equal weights are used. Very complex indicators are, 

however, rather doubtful in terms of consistency and the message for the general 

public, industry and policymakers is often also opaque. Thus one may raise the 

question whether a new indicator concept—following the requirements of the OECD 

(2008) manual and taking into account key economic aspects of green innovation 

dynamics—can be developed. Before presenting such a new approach a few general 

remarks about the System of National Accounts are useful to make clear the 

analytical line of reasoning developed subsequently. 

The most common indicator used to assess both economic performance and 

economic well-being is gross domestic product (GDP: in line with the UN Systems 

of National Accounts), which indicates the sum of all newly produced goods and 

services in a given year. If one wants to consider long term economic development 

perspectives one would not consider gross domestic product, rather one has to


consider Net Domestic Product (Y’) which is GDP minus capital depreciations. 

Taking into account capital depreciations is important since an economy can 

maintain its production potential only if the stock of input factors—capital K, labor 

L and technology A—are maintained; ultimately one is only interested in per capita 

consumption C/L which is the difference of per capita production (y=:Y/L) and the 

sum of private gross investment per capita (I/L) and government consumption per 

capita (G/L). However, in reality natural resources R—consisting of renewable and 

non-renewables—also are input factors in production. Therefore, “Green Net 

Domestic Product” may be defined here as net national product minus depreciations 

on natural resources. To indeed consider such a GNDP is important for many 

countries which are used to heavily exploiting their respective natural resources. 

Exploiting nonrenewable resources comes at considerable costs for long term 

economic development since running down the stock of non-renewables implies that 

future production will decline at some point of time t. 

The World Bank has highlighted the role of depreciations on natural resources, 

namely by calculating genuine savings ratios S’/Y where S’ is standard savings S 

minus depreciations on capital minus depreciations on natural resources (and also 

minus expenditures on education which are required expenditures for maintaining 

the stock of human capital; and minus some other elements which are detrimental to 

sustained economic development—see the subsequent discussion). One should note 

that there is some positive correlation between gross domestic product per capita and 

subjective well-being as is shown in recent analysis (Stevenson and Wolfers 2008). 

Policymakers thus have a strong tendency to emphasize that rising GDP per capita is 

an important goal. At the same time, it is fairly obvious that the general public is not 

aware of the difference between Gross Domestic Product and Net Domestic Product 

(NDP)—let alone the significance of NDP and Green Net Domestic Product 

(Sustainable Product). The problem is that the UN has not adopted any major 

modernization of its System of National Accounts in the past decades although there 

have been broad international discussions about the greening of national accounts 

(see e.g. Bartelmus 2001). The UN has developed an approach labeled System of 

Integrated Economic Environmental Accounts (SEEA) which, however, has not 

replaced the standard Systems of National Accounts. SEEA basically considers 

depreciations on natural capital, but the system is rather incomplete as appreciations 

of natural resources are not taken into account—e.g. the SEEA does not adequately 

consider improvements of the quality of natural resources (e.g., water quality of 

rivers which has improved in many EU countries over time). An interesting indicator 

to measure the quality of life is the UN Human Development Index which 

aggregates per capita income, education and life expectancy. Life expectancy is 

related to many factors where one may argue that the quality of life is one of them. 

Another indicator is the Index of Sustainable Economic Welfare (ISEW), based on 

John Cobb (Cobb (1989)), who basically has argued that welfare should be 

measured on the basis of per capita consumption, value-added in the self-service 

economy (not covered by the System of National Accounts) and consumer durables, 

but expenditures which are necessary to maintain production should be deducted 

(e.g., expenditures on health care, expenditures for commuting to work). The 

elements contained in the ISEW are not fully convincing, and the policy community 

has not taken much notice of this.


In the subsequent analysis, it will be argued that one should focus indeed on 

broader concepts of Global Sustainability: A broader concept should take into 

account the role of international competitiveness and technological progress 

adequately. Section 2 takes a look at traditional approaches to environmental 

damaging, and Section 3 presents results for the new composite indicator on global 

sustainability, the final section presents policy conclusions. The main results are also 

presented in form of a global map. 

2 Traditional approaches to environmental damaging and innovation theory 

Standard approaches to environmental damaging emphasize much of the issue of 

non-renewable resources. This focus is not surprising, as some vital resources used 

in industry are important non-renewable inputs. However, one should not overlook 

the fact that innovation dynamics and technological progress typically can mitigate 

some of the problems in the long-run—here, the focus is on both process 

innovations, which economize on the use of resources, as well as product 

innovations, which might bring about the use of different non-renewable or of 

synthetic chemical inputs. At the same time, one may argue that until 2050 there will 

be considerable global population growth and most of the output growth will come 

from Asia—including China and India. In these countries, emphasis on fighting 

global warming is not naturally a top priority, rather economic catching-up figures 

prominently in the political system are; and economic analysis suggests that China 

and India still have a large potential for economic catching-up and long term growth, 

respectively (Dimaranan et al. 2009). Nevertheless, one may emphasize that 

economic globalization also creates new opportunities for international technology 

transfer and for trade with environmental (green) goods. If there is more trade with 

green goods and, if certain countries successfully specialize in the production and 

export of such goods, the global abilities in the field of environmental modernization 

might be sufficient to cope with global warming problems: This means the ability to 

fight global warming, on the one hand, and on the other hand, the ability to mitigate 

the effects of global warming. A potential problem of putting more emphasis on 

innovation dynamics is that a wave of product innovations could trigger additional 

emissions, which would partly or fully offset the ecological benefits associated with 

higher energy efficiency that would result in a generally more efficient way to use 

natural resources. 

Sustainability means the ability of future generations to achieve at least the same 

standard of living as the current generation has achieved. If one adopts a national 

sustainability perspective this puts the focus on sustainable economic development 

in every country of the world economy. Analytical consistency in terms of 

sustainability imposes certain analytical and logic requirements: 

& As a matter of consistency one may expect that if there is a group of countries 

which represents—according to specific sustainability indicators—sustainable 

development other countries converging to the same structural parameters of the 

economy (say per capita income and per capita emissions as well as other 

relevant parameters) will also be classified as sustainable;


& if all countries are sustainable there is sustainability of the overall world 

economy. What sounds trivial at first is quite a challenge if one considers certain 

indicators as we shall see. 

An important approach to sustainability has been presented by the World Bank 

which calculates genuine savings rates. The basic idea of a broadly defined savings 

rate is to take into account that the current per capita consumption can only be 

maintained if the overall capital stock—physical capital, human capital and natural 

capital—can be maintained. To put it differently: an economy with a negative 

genuine savings rate is not sustainable. The genuine savings rate concept is quite 

useful if one is to understand the prospect of sustainable development of individual 

countries. Figures on the genuine savings rate basically suggest that OECD countries 

are well positioned, particularly the US (World Bank (2006)). This, however, is 

doubtful, because it is clear that in case the South would converge to consumption 

patterns of the OECD countries—and would achieve economic convergence in terms 

of per capita income—the world could hardly survive because the amounts of 

emissions and waste would be too large to be absorbed by the earth. For example, 

the CO2 emissions would be way above any value considered compatible with 

sustainability as defined by the IPCC (Intergovernmental Panel on Climate Change) 

and the STERN report. 

The World Bank approach is partly flawed in the sense that it does not truly take 

into account the analytical challenge of open economies. To make this point clear, let 

us consider the concept of embedded energy which looks at input output tables in 

order to find out which share of the use of energy (and hence CO 2 emissions) are 

related to exports or net exports of goods and services. For example, the US has run 

a large bilateral trade deficit with China—and indeed the rest of the world—for 

many years and this implies that the “embedded genuine savings rate” (EGSR) of the 

US has to be corrected in a way that the EGSR is lower than indicated by the World 

Bank. Conversely, China’s EGSR is higher than indicated by the World Bank. To put 

it differently: While the genuine savings rate indeed is useful to assess sustainability 

of individual countries at first glance, a second glance which takes into account the 

indirect international emissions and indirect running down of foreign stocks of 

resources (e.g., deforestation in Latin America or Asia due to net US/EU imports of 

goods using forest products as intermediate inputs) related to trade represents a 

different perspective; EGSR should not be misinterpreted to take the responsibility 

from certain countries, however, EGSR and the genuine savings rate concept— 

standing for two sides of the same coin—might become a starting point for more 

green technology cooperation between the US and China or the EU and China. 

Considering the embedded genuine savings rate helps to avoid the misperception 

that if all countries in the South of the world economy should become like OECD 

countries the overall world economy should be sustainable. According to the World 

Bank’s genuine savings rate, the US in 2000 has been on a rather sustainable 

economic growth path. However, it is clear that if all non-US countries in the world 

economy had the same structural parameter—including the same per capita income 

and the same emissions per capita—as the United States there would be no global 

sustainable development. If, however, one considers embedded genuine savings 

rates, the picture looks different. For instance, if one assumes that the embedded


genuine savings rate for the US is lower by 1/5 than the genuine savings rate, it is 

clear that the US position is not as favorable as the World Bank data suggest. 

The ideal way to correct the World Bank genuine savings rate data is to consider 

input–output and trade data for the world economy so that one can calculate the 

embedded genuine savings rate; however, such data are available only for a few 

countries, but in a pragmatic way one may attribute China’s depreciations on natural 

resources and the CO 2 emissions to the US and the EU countries as well as other 

countries vis-à-vis China runs a sustained bilateral trade balance surplus. A 

pragmatic correction thus could rely on considering the bilateral export surplus of 

China—e.g., if the ratio of total exports to GDP in China is 40% and if ½ of China’s 

export surplus of China is associated with the US then 20% of China’s CO2 

emissions can effectively be attributed to the US. One might argue that considering 

such corrected, virtual CO2 emissions is not really adequate since global warming 

problems depend indeed on the global emissions of CO2, while individual country 

positions are of minor relevance. However, from a policy perspective it is quite 

important to have a clear understanding of which countries are effectively 

responsible for what share of CO2 emissions in the world economy. As sources of 

CO2 emissions are both local and national, it is indeed important to not only consider 

the embedded genuine savings rate but also to know which country are responsible 

for which amount of CO2 emissions. 

In the literature, one finds partial approaches to the issue of global sustainability. 

The concept of the ecological footprint (Wackernagel 1994; Wackernagel and Rees 

1996)—as suggested by the WWF (see e.g. Wiedmann and Minx 2007)—is one 

important element. Ecological footprint summarizes on a per capita basis (in an 

internationally comparative way) the use of land, fish, water, agricultural land and the 

CO2 footprint in one indicator so that one can understand how strong the individual’s 

pressure on the capacity of the earth to deliver all required natural services really is. 

At the same time, one wonders to which extent one may develop new indicator 

approaches which emphasize the aspects of sustainability in a convincing way. The 

Global Footprint indicator calculated by the World Wildlife Fund and its 

international network indicates the quantitative use of resources for production, 

namely on a per capita basis GLOBAL FOOTPRINT NETWORK (2009). It thus is 

a rather crude indicator of the pressure on the global biosphere and the atmosphere. 

However, it has no truly economic dimension related to international competition and 

competitiveness, respectively. If, say, country I has the same global per capita footprint 

as country II, while the latter is strongly specialized in the production and export of 

green goods—which help to improve the quality of the environment and to increase the 

absorptive capacity of the biosphere of the importing countries, respectively—the 

Global Footprint approach does not differentiate between country I and country II. 

If the general public and the private sector as well as policymakers are to encourage 

global environmental problem solving it would be useful to have a broadly informative 

indicator which includes green international competitiveness—see the subsequent 

analysis. One may argue that a positive revealed comparative advantage (RCA) for 

certain sectors is economically and ecologically more important than in other sectors, 

however, we consider the broad picture across all sectors considered as relevant by the 

OECD. Modified RCAs (MRCA) are particularly useful indicators since they are not 

distorted by current account imbalances—as is the traditional RCA indicator which


simply compares the sectoral export import ratio with the aggregate export import ratio 

(Comtrade data base of the United Nations and World Development Indicators/WDI 

are used in the subsequent calculations). 

As regards as adjustment dynamics, it is clear that a static view of the economy 

and world ecological system is not adequate; rather Schumpeterian innovation 

perspective is required. 

2.1 Growth and exhaustible natural resources 

Natural resources, pollution and other environmental issues are not considered in the 

classical growth model of Solow. Many economists—from Malthus (1798) to 

Hotelling (1931) and Bretschger (2009)—have argued that the scarcity of land and 

natural resources, respectively, could be an obstacle in obtaining sustainable growth. 

Nordhaus (1974) described the impossibility of an infinite and long-term economic 

growth based on exhaustible energy; he has basically emphasized that nonrenewable 

resources are critical long-run challenges, along with three other aspects: 

& Limitations of resources: certain key resources are non-renewable and substitution 

through alternative exhaustible resources is often complex; 

& Environmental effects—the use of resources causes emissions or effluents and 

dealing with those is costly; 

& There will be rising prices of the exhaustible energy resources. 

With connection to this, back-stop technologies or innovations have a crucial role 

for the long-term economic perspective and for the optimal energy price level. The 

effect of a back-stop technology 1 on the resources price path can be presented in a 

straightforward way (Fig. 1): 

A standard insight—on the assumption of a perfect competition and a linear 

demand curve—is that the price will rise in the long run due to rising extraction 

costs. With the use of a new technology (lower marginal costs bc1) one will have a 

lower price until the exhaustion of a new substitute. It would, however, be inefficient 

not to use up new resources completely. In this context, one should emphasize that 

the initial price must remain below bc1 < p. Due to the new attractive supply, the 

demand will increase, and the resource will be exhausted earlier (T1). With a more 

innovative technology, and more favorable extraction costs (bc2), one achieves an 

even earlier extraction time (T2) (Wacker and Blank 1999:43). In a similar way, 

Levy (2000) shows that a decrease of the initial average costs by one dollar leads to 

a decrease of the spot prices by somewhat less than a dollar. 

With regards to the promotion of these technologies, governments are faced with 

two different approaches: 

– “Technology Push” refers to the identification of a potential technology and the 

support of the research and development (R&D), in order to bring a competitive 

product on the market. “The Technology Push”—approach basically argues that 

1 One can mention the following back-stop technologies concerning today’s knowledge level: Solar power 

and hydrogen and other renewable energy technologies, possible nuclear fission systems on the basis of 

the breeder reactors or light-water reactors with uranium production, new nuclear fusion techniques 

(Hensing et al. 1998).


pt 

p0 

1 

p0 

2 

p0 

t0 

Source: (WACKER/BLANK, 1999) 

Fig. 1 Use of back-stop technology 

Use of Back-stop 

Technology 

the primary focus should be on the development of Green House Gas reduction 

technologies: via public R&D programs and not via obligatory regulations, such 

as restrictions on emission. Obligatory restrictions may be used only if the 

innovations would sufficiently lower the costs of green house gas emissions. 

– The opposite “Market Pull”-approach stresses that technological innovation 

must come primarily from the private sector. In this context, the economic 

interaction of changing needs and shifts in technologies (supply side) bring 

about new appropriate products. The focus of this approach lies in the fact that 

the obligatory restrictions could force the enterprises to innovations in search for 

cost reduction (Grubb 2004:9; Hierl and Palinkas 2007: 5). 

The origins of environmental problems and the various solutions proposed by 

businesses and institutions in innovative green technologies, have been often 

examined since the 80s and 90s: The concepts, as well as the conditions for the 

emergence and diffusion of technological and institutional innovations are based on 

so-called nonlinear system dynamics, a theory partly introduced by J. A. 

Schumpeter, stating that unforeseeable innovative processes with positive externality 

stand in close relationship with knowledge and learning processes (Farmer and 

Stadler 2005: 172). For most countries, foreign sources of technology account for 

90% or more of the domestic productivity growth. At present, only a handful of rich 

countries account for most of the world’s creation of new technology. G-7 Countries 

accounted for 84% of the world‘s R&D, but their world GDP share is 64%. (Keller 

2004). The pattern of worldwide technical change is, thus, determined in large part 

by international technology diffusion. 

Aghion et al. (2009) argue that radical innovations are needed to bring about 

strong progress in CO2 emissions: Given the fact that the share of green patents in 

total global patents is only about 2%, one cannot expect that incremental changes in 

technologies will bring about strong improvements in energy efficiency and massive 

T2 

T1 

T 

t 

p 

bc 1 

bc 2


reductions of CO2 emissions per capita; while the generation of electricity is a major 

cause of CO2 emissions the share of R&D expenditures in the sector’s revenues was 

only 0.5%. 

3 New indicator concept 

Basically, one could build indicators based on the individual, which often is a good 

way to motivate individuals to reconsider their respective style of living. 

Alternatively (or in a complementary way), one may develop indicators with a 

focus on individual countries so that the focus is more on political action, including 

opportunities for international cooperation. A consistent theoretical basis for a global 

sustainability indicator is useful and it is therefore argued here that one should focus 

on three elements for assessing global sustainability. Here an indicator set will be 

suggested where the main aspects are: 

& Ability to maintain the current standard of living based on the current capital stock 

(broadly defined). Hence “genuine savings rates”—including the use of forests and 

non-renewable energy sources—are an important aspect. To the extent that 

countries are unable to maintain the broader capital stock (including natural 

resources) there is no sustainable consumption to be expected for the long run. 

& Ability to solve environmental problems: If we had an adequate sub-indicator— 

related to innovation dynamics—the composite sustainability indicator would 

then have a true economic forward-looking dimension. If countries enjoy a 

positive revealed comparative advantage in the export of environmental products 

(“green goods”) WTO (1999), one may argue that the respective country 

contributes to global solving of environmental problems. As it has specialized 

successfully in exporting environmental products, it is contributing to improving 

the global environmental quality; also, countries which have specialized in 

exports of green goods may be expected to use green goods intensively 

themselves—not least because of the natural knowledge advantage in producer 

countries and because of the standard home bias of consumers. Countries will be 

ranked high if they have a high modified RCA (MRCA) in green goods: The 

MRCA for sector i is defined in such a way that the indicator is zero if the 

respective sector’s export share is the same as that of all competitors in the world 

market and it is normalized in a way that it falls in the range −1,1 (with positive 

values indicating an international competitive advantage). 

& Pressure on the climate in the sense of global warming. Here CO 2 emissions are 

clearly a crucial element to consider. The share of renewables could be an 

additional element, and a rising share over time would indicate not only an 

improvement of the environmental quality—read less pressure for global 

warming—but also reflect “green innovation dynamics”. 

& The aggregate indicator is based on the sum of the indicator values for relative 

genuine savings rate (s’ of the respective country divided by the world average 

s’ W ), the relative CO 2 per capita indicator (CO 2 per capita divided by the average 

of global average CO 2 per capita). In principle aggregation of sub-indicators 

should use a weighing scheme based on empirical analysis.


A synthetic indicator can conveniently summarize the various dimensions to be 

considered, and this indeed is done subsequently. 

For a group of countries, the genuine savings rate and the gross domestic savings 

rate are shown for the year 2000. The definition of net national savings is gross 

national savings minus capital depreciations (consumption of fixed capital); if we 

additionally subtract education expenditures, energy depletion, mineral depletion, 

net forest depletion, PM10 damage (particulate matter) and CO 2-related damage on 

has the genuine savings rate. 

Sustainability (defined in a broad sense) is weak—based on standard World Bank 

data—if the genuine savings rate is relatively low. Comparing data from the World 

Bank on this topic it can be seen that the genuine saving is generally smaller than the 

gross domestic saving. This is particularly the case for Azerbaijan, Kazakhstan, Iran, 

Saudi Arabia and Russia. While all of them report negative genuine savings rates, 

the latter two are in a very weak position since the genuine savings rate exceeded 

−10%. Moreover it is also noteworthy that for many countries there is a large gap 

between the standard savings rate and the genuine savings rate. This suggests that 

with respect to economic sustainability there is a veil of ignorance in the broader 

public and possibly also among policy makers. 

A crucial dimension of global sustainability is CO2 emissions per capita; this 

indicator mainly is related to the use of energy for production and consumption, 

respectively. The share of renewable also is a crucial element for climate policies. 

The energy sector, however, is subject to considerable relative price shifts over time 

and indeed has reacted with innovations to strong price shocks. High and rising oil 

prices have undermined global economic dynamics in the period from 2006 to 2008, 

and representatives of industry and OECD countries have raised the issue as to how, 

why, and how long such price increases will continue. While it seems obvious that 

sustained relative price changes should stimulate innovation—see the analysis of 

Grupp (1999) for the case of the OPEC price shocks of the 1970s—as well as 

substitution effects on the demand side and the supply side, it is rather unclear which 

mechanisms shape the price dynamics in the short-term and the long run. The 

following analysis takes a closer look at the issues, presents new approaches for 

economic modeling and also suggests new policy conclusions. 

In the wake of the two oil price shocks of the 1970s—each bringing with it a 

quadrupling of the oil price—, the economics of exhaustible resources became an 

important research field (e.g. Stiglitz 1974; Dasgupta and Heal 1979; Sinn 1981). Oil 

and gas are particular examples of non-renewable resources, and they are politically 

sensitive since the main deposits are concentrated regionally, in the case of oil in 

politically rather sensitive Arab countries as well as Iran and Russia. In addition, 

major oil producers have established OPEC, which became a powerful cartel in the 

1970s when it controlled about 60% of the world market for oil. As transportation 

costs for oil are very small, the oil price is a true world market price since 

equilibrium is determined by world oil supply and global oil demand. There is 

considerable short-term oil price volatility in the short run, und there have been 

major shifts in oil prices over the medium term. Changes in market structure will 

affect the optimum rate of depletion of resources (Khalatbari 1977). 

The oil and gas sector has a long history of high Schumpeterian dynamics, where 

analysis by Enos (1962) suggests there is a time lag of about 11 years between


invention and innovation. By implication, R&D promotion in this industry will go 

along with considerable time lags with respect to innovation—this is also a challenge 

for policy makers, who would have to apply a relatively long time horizon. As 

regards R&D Promotion, Furtado (1997) found that differences in the degree of 

appropriability between upstream and downstream of the oil industry had a great 

impact on effect of R&D promotion. There are regional case studies on the dynamics 

of innovation in the oil and gas industry—concerning Stavanger and Aberdeen 

(Hatakenaka et al. 2006)—which show that different approaches to R&D promotion 

can have similar effects. It is also noteworthy that the energy sector has been a 

leading early user of information technology (Walker 1986). 

A rising relative price of non-renewables is often considered inevitable, since 

there is long-term global population growth and also high aggregate output growth 

since the 1990s in the world economy. The use of fossil energy sources does not 

only have economic issues at stake, but it is also relevant in terms of global warming 

issues. The Stern Report (Stern et al. 2006; Nordhaus 2006; Latif 2009) has raised 

international attention about the dynamics of the use of energy and the associated 

CO2 emissions as have the policy activities and UN reports with a focus on the 

Kyoto Protocol. There is long term concern that high economic global growth will 

strongly stimulate the demand for energy and hence raise emissions. At the same 

time, there are also medium term concerns about the potential negative impact of oil 

price shocks. While higher real oil prices might be useful at encouraging a more 

efficient use of energy resources, there could also be inflation and unemployment 

problems linked to sudden rises of nominal oil prices. 

As regards CO 2 emissions per capita we see a well known picture in which the 

United States was leading with a relatively poor performance up to 2000 (Fig. 2). 

As regards the consistent composite indicator (with adequate centering) a positive 

position is strictly defined as a favorable global position, a negative value reflects 

metric tons 

6 

5 

4 

3 

2 

1 

0 

Austria 

Ajzerbeijan 

Belgium 

Brazil 

China 

Czech Republic 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 

Ireland 

Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 

Netherlands 

Norway 

Philippines 

Poland 

Portugal 

Romania 

Russia 

Saudi Arabia 

Slovak Repulic 

Slovenia 

Sweden 

Switzerland 

Source: WDI, 2008 

Fig. 2 CO2 emissions 

CO2 Emissions (per Capita), 2000 

Country 

Turkey 

United Kingdom 

USA


ecological weakness and to some extent lack of green innovativeness or 

inefficiencies in the use of energy-intensive products (as mirrored in the CO2 

per capita indicator); more and better innovations can improve the position of the 

composite indicator so that the main message is that green innovation dynamics 

matter—thus government should encourage green Schumpeterian dynamics, 

particularly if there are positive national or international external effects. 

Specialization in green knowledge-intensive industries and positive green RCAs 

could go along with national or international positive external effects, however, 

there are hardly empirical analyses available here. The aggregate indicator shows 

results which, of course, are somewhat different from the simple aggregation 

procedure; we clearly can see that careful standardization is required for consistent 

results. 

As already mentioned, from a methodological point the weights attached to the 

individual components of the indicator could be determined through empirical 

analysis. Factor loadings are useful starting points for a valid approach. It should be 

emphasized that the new indicator set proposed (even disregarding the weighing 

issue) puts the analytical and policy focus on the issue of global sustainability in a 

new way. The indicator emphasizes long term opportunities and global sustainability. 

While this approach is only a modest contribution to the broader discussion about 

globalization and sustainability, it nevertheless represents analytical progress. There 

is little doubt that specific issues of sustainability—e.g., global warming (see 

Appendix)—will attract particular interest from the media and the political systems. 

At the same time, one may emphasize that the new broad indicators developed are 

useful complements to existing sustainability indicators such as the global footprint 

from the WWF. 

The indicator presented is complementary to existing sustainability indicators. 

However, it has two specific advantages: 

& It emphasizes within the composite indicator a dynamic view, namely the 

Schumpeterian perspective on environmental product innovations. 

& It is in line with the OECD handbook on composite indicators. 

The indicator for SO2 emissions can be easily aggregated for global emissions, 

while the genuine savings indicator cannot easily be aggregated if one wants to get a 

global sustainnability information. However, as regards the genuine savings 

indicator one may argue that if the population weighted global savings indicator 

falls below a critical level there is no global sustainability. One might argue that the 

global genuine savings rate—a concept which obviously does not need to focus on 

embedded (indirect) use of materials and energy—should reach at least 5% because 

otherwise there is a risk that adverse economic or ecological shocks could lead to a 

global genuine savings rate which is close to zero; and such a situation in turn could 

lead to economic and political international or national conflicts which in turn could 

further reduce genuine savings rates in many countries so that global sustainability 

seems to be impaired. 

There are many further issues and aspects of the indicator discussion which can 

be explored in the future. One may want to include more subindicators and to also 

consider robustness tests, namely whether changing weights of individual subindicators 

seriously changes the ranking of countries in the composite index.


Since the global warming problem refers to CO2 emissions and other greenhouse 

gases from a worldwide perspective, it is not efficient to reduce emissions of 

greenhouse gases in particular countries through particular national subsidies. A global 

approach to establishing an ETS would be useful. However, one may emphasize that 

stabilization of financial markets should be achieved first since otherwise a very high 

volatility of certificate prices is to be expected; future markets for such certificates also 

should be developed carefully and it is not obvious such markets necessarily will be in 

the US; the EU has a certain advantage here as the EU has taken a lead in the trading 

of emission certificates. There are policy pitfalls which one should avoid in setting up 

ETS; e.g the German government has largely exempted the most energy-intensive 

sectors in the first allocation period—those sectors would normally have rather big 

opportunities to achieve cuts in energy intensity and CO2 emissions, respectively; 

Klepper and Peterson (2006) have calculated that the welfare loss of emission trading 

could have been 0.7% of GDP in the first German National Allocation Plan while in 

reality the welfare amounted to 2.5% of GDP. 

Government incentives on renewables could be a useful element of environmental 

modernization. As regards the share of renewable in the use of energy generation the 

following tables show that there are large differences across countries. Following the 

general approach presented here—with the world average set at zero (and the indicator 

normalized in a way that it falls in the range (−1, 1)—we can see that there are some 

countries which are positively specialized in renewable energy: Austria, Brazil, 

Finland India, Italy, Latvia, Philippines, Portugal, Sweden, Switzerland and Turkey 

have positive indicators. It is noteworthy, that the position of Azerbaijan, Iran, 

Kazakhstan, Netherlands, Russia and the UK are clearly negative. Comparing 2000 

and 2007 the worsening position of China is remarkable, at the same time the UK has 

slightly and Germany has strongly improved its respective position. There is no doubt 

that countries such as Russia and China could do much better in the field of renewable 

provided that government encourages innovative firms and innovations in the 

renewable sector on a broader scale (Fig. 3). 

3.1 Basic reflections on constructing a comprehensive composite indicator 

In the following analysis, a composite indicator measuring global sustainability in 

energy consumption is presented. In the first step, the influence of different partial 

indicators on the composite indicator is discussed by analysing sets of composite 

indicators with fixed identical weights. In the second step, the weights are allowed to 

be flexible/different and are estimated using factor analysis. Building on the insights 

gained in these two steps, a specific composite indicator is developed. 

However, to begin with, the partial indicators will be introduced and it will be 

argued in how far they differ from the standard approaches in the literature. 

Additionally, the modes in which the partial indicators are transformed into 

centralized and normalized versions are presented. 

3.1.1 Points of departure: revealed comparative advantage 

There is a long history of using the revealed comparative advantage (RCA) as an 

indicator of international competitiveness, which can also be an indicator for


1 

0,8 

0,6 

0,4 

0,2 

0 

-0,2 

-0,4 

-0,6 

-0,8 

-1 

1 

0,8 

0,6 

0,4 

0,2 

0 

-0,2 

-0,4 

-0,6 

-0,8 

-1 

Comparative Share of Renewable Energy, (2000); (Benchmark=World average) CompShareRE=TANHYPLN 

((RE Country /TotalEnergy Country )/ 

(RE world /TotalEnergy world )) 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 

Slovak Republic 

Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 


United States 

Country 

Comparative Share of Renewable Energy, (2007); (Benchmark=World average) CompShareRE= TANHYPLN 

((RE Country /TotalEnergy Country )/ 

(REworld/TotalEnergyworld)) 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 

Slovak Republic 

Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 


United States 

Source: IEA Database, EIIW calculations 

Country 

Fig. 3 Normalized indicator on the share of renewables in selected countries: 2000 vs. 2007 

assessing the specialization in green environmental goods. The standard Balassa 

indicator considers the sectoral export–import ratio (x/j) of sector i relative to the 

total export–import ratio (X/J) and concludes that an indicator above unity stands for 

international competitiveness in the respective sector. It is useful to take logarithms 

so that one can calculate ln(x/j)/ln(X/J): If the indicator exceeds zero, there is a


positive successful specialization, if the indicator is negative, the country has a 

comparative disadvantage. Minor deviations from zero—both positive and negative— 

will normally be considered as a result of random shocks (to have a positively 

significant sectoral specialization, a critical threshold value has to be exceeded). 

Since this indicator takes existing goods and services into account, there is a 

natural bias against product innovations, particularly in new fields; innovative 

countries that have many export products that stand at the beginning of the product 

cycle, will typically only export a few goods at relatively high prices—only after a 

few starting years will exports grow strongly. Foreign direct investment might also 

somewhat distort the picture, namely to the extent that multinational companies 

could relocate production of green products to foreign countries. To the extent that 

foreign subsidiaries become major exporters over time,—a typical case in 

manufacturing industry in many countries—the technological strength of an 

economy with high cumulated foreign direct investment outflows might contribute 

to a relatively weak RCA position, as a considerable share of imports is from 

subsidiaries abroad. 

A slight modification of the Balassa RCA indicator is based on Borbèly (2006): 

The modified RCA indicator for export data (MRCA) is defined as: 

0 

0 

B B 

B B 

MRCAc; j ¼ tanhypBlnB @ @ 

xc; j 

Pn xc; j 

j¼1 

1 

C 

A ln 

0 

B 

@ 

xI; j 

Pn xI; j 

j¼1 

11 

CC 

CC 

CC 

AA 

where xc,j gives the exports in sector j of region / country c and xI,j gives the exports 

in sector j of the reference market I (in this case the EU 27 market). 

In this context, the index uses data for exports and calculates the ratio of the 

export share of a sector—in this case, the sector of environmental green goods—in 

one country to the export share of that sector in a reference market (e.g. EU27 or the 

world market). In most cases, it is adequate to use a reference market with a 

homogenous institutional set-up, such as the EU27 market; an alternative is the 

world market, which stands for a more heterogeneous institutional setting than the 

EU27. The selected countries make up most of the world market (about 80%), but 

not the whole world economy. Therefore, for practical purposes,—e.g. avoiding the 

problem of missing data—we have decided that the reference market used is the 

market consisting of the countries observed in the analysis. 

Furthermore, it is important to mention that the modified RCA indicator, as 

presented above, allows to be applied to a much broader range of data than just 

export data. While it is possible to use the indicator for the relative position of 

macroeconomic data, such as labor or patents, in the present case, it is also applied to 

the share of renewable energy production in countries instead of the export data—the 

idea is to consider the relative renewables position of a given country: The resulting 

RCA-indicator (SoRRCA) gives the relative position of one country, regarding 

renewable energy production in comparison with the share of renewable energy 

production in the reference market, which in this case is the total world market. It 

can be shown that for this case, the results will not be influenced much by either the 

world market or the market consisting of all observed countries. 

ð1Þ


In addition to the traditional and modified RCA indicators, as introduced by 

Balassa (1965) and Borbèly (2006), respectively, we also test for volume-weighted 

RCAs. In this case, the modified RCAs (MRCAs) are calculated and multiplied by 

the countries’ absolute exports, resulting in the volume-weighted RCA (VolRCA). 

The results for the year 2000 are shown in Fig. 4. Here, the basic idea is not only to 

look at the relative sectoral export position for various countries, but to emphasize 

that a country whose green sector has a positive specialization in green export goods 

adds more to the global environmental problem solving, the higher the absolute 

volume of green exports. From this perspective, large countries with a high positive 

green export specialization stand for a particularly favorable performance. 

Figure 4 shows that the indicator modified in such a way allows for 

discrimination between those countries which are leading in weighted green RCAs, 

and those that fall behind, either in absolute volume or in green specialization. 

Leading countries, like Germany, Italy, Japan, Mexico or the USA, not only export a 

high volume of environmental goods, but also hold a significant advantage 

compared to the other countries. In contrast to that group of countries, the countries 

that show a comparative disadvantage can be divided into a group that has a green 

export advantage but a small export volume; and into a group that has a relatively 

high volume but no strong comparative advantage. The latter countries are mostly 

larger countries that are major international suppliers of green goods, but compared 

to their other industries, the environmental goods do not play a very important role. 

These countries have a potential to become future leaders in the area and a more 

detailed analysis of the countries and the dynamics would allow an insight into the 

way comparative advantages and growing sectoral leadership positions are 

established—an issue left for future research. 

1.0000 

0.5000 

0.0000 

-0.5000 

-1.0000 

Germany 

Italy 

Fig. 4 Volume-weighted RCAs for the year 2000 

Japan 

Mexico 

USA


3.1.2 Standardization 

All indicators, except MRCA or SoRRCA, are neither centralized around zero nor 

have they clearly defined finite and symmetrical boundaries, especially not in the 

same way as the RCA indicators, whose results lie in the interval [−1, 1]. If the 

intention is, therefore, to combine the partial indicators additively, as will be done in 

the present approach, it is necessary to ensure that the indicators are concentrated 

around zero and that their values do not exceed the above stated interval. 

Furthermore, it is necessary to ensure that the best possible result is +1 and the 

worst possible result is equivalent to −1. 

Centralization is easily achieved by calculating the mean for an indicator and 

subtracting it from the individual indicator value. Alternatively, a given average (like 

the world average) can be taken and used as an approximate mean. The resulting 

indicator ensures that the number of countries with a negative value is equal to the 

number with positive values. 

The problem in this context is the temporal stability of the calculated means. If 

the means do not stay relatively constant over time, a problem arises, where a 

positive or negative position does not depend so much on the values of a single 

country but mostly on the values of other countries. 

It can be shown that, while the means of the genuine savings rate and the CO2 

output remain mostly on the same level, the mean of the total exports is 

monotonically rising. This will be a problem, especially in the construction of the 

volume weighted RCA indicator, VolRCA. 

Even if the VolRCA indicator is inherently relative in nature, this effect solely takes 

the absolute volume into account, neglecting the sectoral structure; nonetheless, this 

trade-off is necessary to combine export-volumes and sectoral advantages, and until 

now, no alternative approach is known that could take care of this trade-off. 

The second part of the standardization process is the normalization of the data. It 

is possible to take different approaches. The most common one is to divide the 

indicator values by the range given by the difference between the maximum and the 

minimum value. This approach is also the one that is implemented in this analysis. 

In the table below it is referred to as “normalized(linear)”. 

An alternative is the “normalized(arctan)” approach. Here, the centralized data is 

normalized using the function f(x)=2/π arctan(x). A useful effect of this approach is the 

fact that the result is not influenced by very large or very small outliers. Furthermore, 

the basis of the calculation stays the same and does not differ with the respective data 

used. Using the arctan-functional form also means to work with a functional form that 

is relatively steep for small values. Therefore, the results are very often nearing unity or 

minus 1, and it is very hard to distinguish between them. Additionally, the arctanfunction 

is skewed and will lead to skewed results, which means that distances between 

values are no longer relatively constant. The linear approach will be used in the 

following chapters, considering both of the alternative approaches. 

3.1.3 Fixed weights vs. free weights 

The following table provides the partial indicators used in the following analysis. As 

only linearly normalized variables will be used, only those are mentioned (Fig. 5).


Fig. 5 Partial indicators used 

The composite indicators that will be constructed and discussed below all have 

the form: 

CompositeIndicator ¼ Xn 

i¼1 

wi PartialIndicatori ð2Þ 

It is assumed in the following section that all weights are identical. 

wi ¼ wj ¼ 1 

8i; j ¼ 1; ...; n ð3Þ 

n 

By contrast, in a later section, where the weights are estimated, it is generally true 

that weights differ: 

wi 6¼ wj 8i 6¼ j ¼ 1; ...; n ð4Þ 

In this context it is discussed, whether situations arise where two or more weights 

are identical. 

3.1.4 Fixed weights 

Partial Indicator Abbreviation 

MRCA 

(1) 

MRCA*Exports 

(centralized+normalized; 

Volume Weighted) : VolRCA 

(3) 

Genuine Savings Rate 

(centralized+normalized(linear) 

(7) 

CO2 Generation 

(centralized+normalized(linear)) 

(9) 

Share of Renewables (A) 

SoRRCA 

(normalized, centralized) 

(B) 

The following Fig. 6 show a composite indicator that is constructed from the partial 

indicators for the genuine savings rate, the SoRRCA (Share of Renewables RCA) 

and in the first case the MRCA and in the second case the VolRCA, for the years 

2000, 2006 and 2007. 

The basic of the following Fig. 6 is to highlight to which extend there is a 

difference between our “ideal” preferred composite indicator consisting of (3), (7), 

(9), (A), (B) namely compared two alternative indicators. 

The difference between the two indicators lies in the way the comparative 

advantages in the field of environmental goods are introduced. The first indicator 

uses the traditional MRCA while the second one uses the volume weighted 

MRCA. It can be seen that the second indicator is in most cases more pronounced, 

meaning that positive advantages report higher values and negative advantages 

report lower values.


1.0 

0.5 

0.0 

-0.5 

-1.0 

1.0 

0.5 

0.0 

-0.5 

-1.0 

2000: 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 


Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 

United 

USA 

2006: 

IND (1)+(7)+(B) IND (3)+(7)+(B) 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 


Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 

United 

USA 

IND (1)+(7)+(B) IND (3)+(7)+(B) 

Fig. 6 Indicators showing the influence of the standard RCA indicator vs. the volume-weighted RCA 

indicator 

The first insight gained from Fig. 6 is that in most cases both indicators point in 

the same direction, meaning that if the first one indicates a comparative advantage, 

the second one does so as well. Furthermore, it seems that the second one is 

somewhat less harshly accentuated. Additionally, in the area were the first indicator


1.0 

0.5 

0.0 

-0.5 

-1.0 

2007: 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 


Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 

United 

USA 

Fig. 6 (continued) 

IND (1)+(7)+(B) IND (3)+(7)+(B) 

is insignificantly close to zero, the second one gives a clear indication as to 

whether an advantage is present or not. The last fact that is worth mentioning is 

that, over time, the indicators stay mostly similar. While this does not influence 

the decision concerning the choice of the export RCA, it is, nonetheless, worth 

mentioning as it shows that not only the composite indicators both stay stable, 

but also that there has been rather few dynamics in the last years concerning 

sustainability in the majority of countries. 

Conclusively, it can be said that both partial indicators can be used for the 

creation of a composite indicator, as there is no discernable difference between the 

effects the two have. We decide in favor of the VolRCA since it distinguishes best 

between advantages and disadvantages and, as it will be shown in the following 

sections, using the VolRCA will result in better weights when they are allowed to 

deviate from each other (across subindicators). 

Following the same procedure as above, a composite indicator constructed from 

the partial indicators of the VolRCA, the genuine savings rate and the SoRRCA are 

compared to an indicator additionally containing the CO2 output indicator (Fig. 7). 

In almost all cases, the indicator without the CO2 emissions is more accentuated 

(positive values are higher and negative values and lower) than the indicator 

including them. Combined with the effect that, as shown below, inclusion of the CO 2 

emissions indicator leads to redundancy problems in the composite indicator, it is 

prudent to abstain from using the CO2 emissions indicator. Similar to Fig. 6, the two 

composite indicators compared here stay relatively stable over time, and in the rare 

occasions where the results change, at least the relations of the two indicators to each 

other are kept.


2000: 

1.0 

0.5 

0.0 

-0.5 

-1.0 

2006: 

1.0 

0.5 

0.0 

-0.5 

-1.0 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 


Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 

United 

USA 

IND (3)+(7)+(9)+(B) IND (3)+(7)+(B) 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 


Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 

United 

USA 

IND (3)+(7)+(9)+(B) IND (3)+(7)+(B) 

Fig. 7 Indicators showing the influence of the CO2 indicator 

Finally, in the third part of this analysis, the influence of the share of renewable 

energy production in the energy mix of the countries is observed. Here, the 

composite indicator is calculated from the VolRCA and the genuine savings rate. 

Additionally, the three cases of no inclusion of the share of renewable energy, the 

absolute share of renewable energy and the SoRRCA are considered.


2007: 

1.0 

0.5 

0.0 

-0.5 

-1.0 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 


Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 

United 

USA 

Fig. 7 (continued) 

3.2 Weights from factor analysis 

IND (3)+(7)+(9)+(B) IND (3)+(7)+(B) 

In the following part, the weights are no longer fixed to the number of partial 

indicators used. Instead, a factor analytical approach is used to estimate the values 

for the weights. 

Factor Analysis is a mathematical method from the field of dimension reducing 

algorithms. The goal is to start from a row of observations for different indicators 

and estimate weights for aggregation of the indicators into one or more composite 

indicators. The number of resulting composite indicators will be less than the 

number of indicators to begin with. The method also offers decision support on how 

many indicators will result from the process. In contrast to the traditional application 

of the factor analysis, the number of resulting indicators in this case is fixed, but not 

the number of resulting eigenvalues exceeding given bounds. 

Nevertheless, the eigenvalues play an essential role in constructing the 

composite indicator. In traditional factor analysis, the desired result would be for 

one eigenvalue to dominate all other eigenvalues. The sum over all eigenvalues 

equals the number of partial indicators; traditionally, the ideal result would be for 

the largest eigenvalue to be equal to this sum, whereas all other eigenvalues would 

be zero. This would be the case if all partial indicators were measuring exactly the 

same concept. 

In constructing the present composite indicator, it is desirable to combine different 

concepts around the idea of sustainability. Therefore, it would be best for every 

partial indicator to describe a different concept. The degree to which this goal is


achieved can be seen from the eigenvalues. If all eigenvalues have values near unity, 

it indicates that all partial indicators measure independent concepts. 

This is also the way in which the final decisions on the usage of partial indicators 

of the preceding chapter have been reached. If more than one indicator is possible, 

the one that has the more evenly distributed eigenvalues for all years is chosen. 

The second aspect that is used as a decision criterium is the sign of the 

resulting components, e.g. the resulting weights. It can be seen that the expected 

signs for the weights of all but the CO 2 emissions indicator are expected to be 

positive. This condition is, with the exception of two cases, met by the present 

data, so that it does not offer a reliable means to distinguish between feasible 

partial indicators and non-feasible ones. So, the main decision is made using the 

distribution of eigenvalues. Finally, the resulting components are normalized by 

dividing them by their sum, thus, resulting in weights summing up to unity. An 

overview of the resulting eigenvalues and the components, e.g. weights, is given in 

the “Appendix”. 

Combining the insights from this and the preceding chapter, an ideal global 

indicator can be motivated, which is constructed from the VolRCA, the genuine 

savings rate and the SoRRCA. Figure 8 gives a broad overview of this composite 

indicator for the years 2000, 2006 and 2007. A clear finding is that Austria, Brazil, 

Cyprus, Finland, Germany (in 2006 and 2007, not in 2000), India, Ireland, Italy, 

Japan, Latvia, the Philippines, Portugal, South Africa, Sweden and Switzerland have 

considerable positive indicators; by contrast, Australia, Azerbaijan, Iran, Kazakhstan, 

Russia, Saudi Arabia, the UK and—less pronounced—the USA, the Netherlands 

and Mexico and some other countries—have a negative performance. The 

countries with relatively weak indicator values for sustainability are often rather 

1.0 

0.5 

0.0 

-0.5 

-1.0 

Argentina 

Australia 

Austria 

Azerbaijan 

Belgium 

Brazil 

Bulgaria 

Canada 

China 

Cyprus 


Denmark 

Estonia 


France 

Germany 

Greece 

Hungary 

India 

Indonesia 

Iran 


Fig. 8 EIIW-vita global sustainability indicator 

Israel 

Italy 

Japan 

Kazakhstan 

Latvia 

Lithuania 

Mexico 


Norway 

Philippines 


Portugal 

Romania 

Russia 

Saudi Arabia 


Slovenia 

South Africa 

South Korea 

Spain 

Sweden 


Turkey 

United 

USA 

2000 2006 2007


weak in terms of renewable energy; this weakness, however, can be corrected within 

one or two decades, provided that policymakers give adequate economic incentive 

and support promotion of best international practices. To the extent that countries 

have low per capita income, it will be useful for leading OECD countries to 

encourage relevant international technology transfer in a North–South direction. At 

the same time, successful newly industrialized countries or developing countries 

could also become more active in helping other countries in the South to achieve 

green progress. 

To the extent that international technology transfer is based on the presence of 

multinational companies, there are considerable problems in many poor 

countries: these countries are often politically unstable or have generally 

neglected the creation of a framework that is reliable, consistent and 

investment-friendly. Countries in the South, eager to achieve progress in the 

field of sustainability, are well advised to adjust their economic system and 

the general economic policy strategy in an adequate way. Joint implementation in 

the field of CO 2-reduction could also be useful, the specific issue of raising the 

share of renewable energy should also be emphasized. Solar power, hydropower 

and wind power stand for three interesting options that are partly relevant to every 

country in the world economy. With more countries on the globe involved in 

emission certificate trading, the price of CO2 certificates should increase in the 

medium-term that will stimulate expansion of renewables both in the North and in 

the South. While some economists have raised the issue that promotion of solar 

power and other renewables in the EU is doubtful,—given the EU emission cap— 

as it will bring about a fall of CO 2 certificates, and ultimately, no additional 

progress in climate stabilization. One may raise the counter argument that careful 

nurturing of technology-intensive renewables is a way to stimulate the global 

renewable industry, which is often characterized by static and dynamic economies 

of scale. With a rising share of renewables in the EU’s energy sector, there will 

also be a positive effect on the terms of trade for the EU, as the price of oil and 

gas is bound to fall in a situation in which credible commitment of European 

policymakers has been given to encourage expansion of renewables in the 

medium-term. Sustained green technological progress could contribute to both 

economic growth and a more stable climate. One may also point out that the 

global leader in innovativeness in the information and communication technology 

sector, offers many examples of leading firms (including Google, Deutsche 

Telekom, SAP and many others) whose top management has visibly emphasized 

the switch to higher energy efficiency and to using a higher share of renewable 

energy. 

Given the fact that the transatlantic banking crisis has started to destabilize many 

countries in the South in 2008/09, one should keep a close eye on adequate reforms 

in the international banking system—prospects for environmental sustainability are 

dim if stability in financial markets in OECD countries and elsewhere could not be 

restored. 

There is a host of research issues ahead. One question—that can already be 

answered—concerns the stability of weights over time used in the construction of the 

comprehensive composite indicator. While the weights for every year have been 

calculated independently, one could get further insights if a single set of weights


over all years is calculated. Considering the results shown in the table below, it is not 

straightforward that it is possible to calculate such a common set of weights for the 

available data. Making such a calculation, this results in weights with a distribution 

similar to those for the years 2006 and 2007. 

In 2000, the main weight in the construction of the indicator lies in the savings 

rate and the SoRRCA, whereas the VolRCA only plays a marginal role. By contrast, 

in 2006/2007, all three indicators show similar weights, with a slight dominance by 

the savings rate. In light of these findings, one might conclude,—based on 

exploitation of more data (as those are published)—that the empirical weights 

converge to a rather homogenous distribution (Fig. 9). There is quite a lot of room 

left for conducting further research in the future. However, the basic finding 

emphasized here is that the variables used are very useful in a composite indicator. 

Own calculations 

With the weights derived from factor analysis we can present our summary 

findings in the form of two maps (with grey areas for countries with problems in 

data availability). There is a map for 2000 and another map for 2007—with 

countries grouped in quantiles (leader group=top 20% vs. 3× 20% in the middle of 

the performance distribution and lowest 20%=orange). The map (Fig. 10) shows the 

EIIW-vita Global Sustainability Indicator for each country covered which is 

composed of the following subindices: 

& genuine savings rate (3), 

& volume-weighted green international competitiveness (7) and 

& relative share of renewable in energy production (B). 

Indonesia has suffered a decline in its international position in the period 2000–07 

while Germany and US have improved their performance; compared to 2000, Iran in 

2007 has also performed better in the composite indicator in 2007. China, India and 

Brazil all green, which marks the second best range in the composite indicator 

performance. The approach presented shifts in the analytical focus away from the 

traditional, narrow, perspective on greenhouse gases and puts the emphasis on a 

broader—and more useful—Schumpeterian economic perspective. While there is no 

doubt that the energy sector is important, particularly the share of renewables in 

energy production, a broader sustainability perspective seems to be adequate 

(Fig. 8). 

Fig. 9 Estimated weights from factor analysis 

2000 2006 2007 

(3) 0.01 0.29 0.30 

(7) 0.50 0.39 0.38 

(B) 0.50 0.32 0.31


Fig. 10 The EIIW-vita global sustainability indicator 

4 Policy conclusions 

There is a broad international challenge for the European countries and the global 

community, respectively. The energy sector has two particular traits that make it 

important in both an economic and a political perspective: 

& Investment in the energy-producing sector is characterized by a high capital 

intensity and long amortization periods, so adequate long-term planning in the 

private and the public sectors is required. Such long term planning—including 

financing—is not available in the whole world economy; and the Transatlantic 

Banking Crisis has clearly undermined the stability of the international financial 

system and created serious problems for long term financing. Thus, the banking


crisis is directly undermining the prospects of sustainability policies across many 

countries. 

& Investments of energy users are also mostly long-term. Therefore, it takes time to 

switch to new, more energy-efficient consumption patterns. As energy generation 

and traffic account for almost half of global SO2 emissions, it would be wise to 

not only focus on innovation in the energy sector and in energy-intensive 

products, but to also reconsider the topic of spatial organization of production. 

As long as transportation is not fully integrated into CO 2 emission certificate 

trading, the price of transportation is too low—negative external global warming 

effects are not included in market prices. This also implies that international 

trading patterns are often too extended. Import taxes on the weight of imported 

products might be a remedy to be considered by policymakers, since emissions 

in the transportation of goods are proportionate to the weight of the goods 

(actually to tonkilometers). 

One key problem for the general public as well as for policymakers is the inability 

of simple indicators to convey a clear message about the status of the quality of 

environmental and economic dynamics. The traditional Systems of National 

Accounts does not provide a comprehensive approach which includes crucial green 

aspects of sustainability. The UN has considered several green satellite systems, but 

in reality the standard system of national accounts has effectively remained in place 

so that new impulses for global sustainability could almost be derived from standard 

macroeconomic figures. The global sustainability indicators presented are a fresh 

approach to move towards a better understanding of the international position of 

countries, and hence, for the appropriate policy options to be considered in the field 

of sustainability policies. International organizations, governments, the general 

public as well as firms could be interested in a rather simple consistent set of 

indicators, that convey consistent signals for achieving a higher degree of global 

sustainability. The proposed indicators are a modest contribution to the international 

debate, and they could certainly be refined in several ways. For instance, more 

dimensions of green economic development might be considered, and the future path 

of economic and ecological dynamics might be assessed by including revealed 

comparative advantages (or relative world patent shares) in the field of “green 

patenting”. The new proposed indicators could be important elements of an 

environmental and economic compass, that suggest optimum ways for intelligent 

green development. 

The Global Sustainability Indicator (GSI) provides broad information to firms and 

consumers in the respective countries and thus could encourage green innovations 

and new environmental friendly consumption patterns. 

The GSI also encourages governments in countries eager to catch up with 

leading countries to provide adequate innovation incentives for firms and 

households, respectively. This in turn could encourage international diffusion of 

best practice and thereby contribute to enhanced global sustainability in the 

world economy. 

The Copenhagen process will show to what extent policymakers and actors in the 

business community are able to find new international solutions and to set the right 

incentives for more innovations in the climate policy arena. There is no reason to be


pessimistic, on the contrary, with a world-wide common interest to control global 

warming there is a new field that might trigger more useful international cooperation 

among policymakers in general, and among environmental policies, in particular. 

From an innovation policy perspective there is, however, some reason for pessimism 

in the sense that the Old Economy industries—most of them are highly energy 

intense—are well established and have strong links to the political system while 

small and medium sized innovative firms with relevant R&D activities in global 

climate control typically find it very difficult to get political support. Thus one 

should consider to impose specific taxes on non-renewable energy producers and use 

the proceeds to largely stimulate green innovative firms and sectors, respectively. 

Competition, free trade and foreign direct investment all have their role in 

technology diffusion, but without a critical minimum effort by the EU, Switzerland, 

Norway, the US, China, India, the Asian countries and many other countries it is not 

realistic to assume that a radical reduction of CO2 emissions can be achieved by 

2050. Emphasis should also be put on restoring stability in the financial sector and 

encouraging banks and other financial institutions to take a more long term view. 

Here it would be useful to adopt a volatility tax which would be imposed on the 

variance (or the coefficient of variation) of the rate of return on equity of banks 

(Welfens 2008, 2009). 

It is still to be seen whether or not the Copenhagen process can deliver 

meaningful results in the medium-term and in the long-run. If the financial sector in 

OECD countries and elsewhere remains in a shaky condition, long-term financing 

for investment and innovation will be difficult to obtain in the marketplace. This 

brings us back to the initial conjecture that we need a double sustainability—in the 

banking sector and in the overall economy. The challenges are tough and the waters 

on the way to a sustainable global economic-environmental equilibrium might be 

rough, but the necessary instruments are known: to achieve a critical minimum of 

green innovation dynamics will require careful watching of standard environmental 

and economic statistics, but it will also be quite useful to study the results and 

implications of the EIIW-vita Global Sustainability Indicator. 

Appendix 

Eigenvalues and components 

Figure 11


2000 

RCA normal MOD RCAVOL 

with CO2 without CO2 with CO2 without CO2 

without SoR with SoR with SoRRCA without SoR with SoR with SoRRCA without SoR with SoR with SoRRCA without SoR with SoR with SoRRCA 

EV1 2.151 2.252 2.427 1.516 1.602 1.786 1.682 1.856 2.033 1.014 1.283 1.432 

EV2 0.520 0.969 0.796 0.484 0.969 0.792 0.996 1.044 1.008 0.986 1.006 1.000 

EV3 0.328 0.451 0.449 0.429 0.422 0.323 0.777 0.636 0.711 0.568 

EV4 0.328 0.328 0.323 0.323 

VolRCA 0.796 0.746 0.731 0.871 0.784 0.754 0.163 0.081 0.097 0.712 -0.148 0.015 

SavingsRate 0.867 0.869 0.863 0.871 0.882 0.869 0.904 0.872 0.867 0.712 0.783 0.846 

SoRRCA 0.412 0.628 0.457 0.681 0.564 0.719 0.805 0.846 

CO2emissions -0.876 -0.878 -0.868 -0.915 -0.878 -0.869 

Fig. 11 Eigenvalues and components 

2006 




EV1 1.701 1.791 2.004 1.378 1.441 1.621 1.621 1.519 1.730 1.236 1.243 1.387 

EV2 0.693 0.942 0.794 0.622 0.939 0.759 0.759 1.112 0.998 0.764 1.071 0.937 

EV3 0.605 0.677 0.629 0.620 0.620 0.620 0.708 0.682 0.686 0.676 

EV4 0.590 0.573 0.662 0.590 

VolRCA 0.782 0.738 0.721 0.830 0.785 0.771 0.771 0.434 0.407 0.786 0.726 0.590 

SavingsRate 0.743 0.715 0.679 0.830 0.803 0.756 0.756 0.757 0.704 0.786 0.821 0.795 

SoRRCA -0.430 0.684 0.425 0.675 0.675 0.454 0.708 0.207 0.638 

CO2emissions -0.733 -0.742 -0.745 -0.743 -0.753 

2007 




EV1 1.635 1.743 1.974 1.386 1.468 1.667 1.439 1.502 1733.000 1.279 1.288 1.458 

EV2 0.760 0.927 0.808 0.614 0.918 0.722 0.883 1.109 0.987 0.721 1.053 0.897 

EV3 0.605 0.727 0.621 0.614 0.611 0.678 0.732 0.679 0.658 0.645 

EV4 0.603 0.598 0.658 0.601 

VolRCA 0.785 0.742 0.725 0.832 0.792 0.776 0.664 0.521 0.482 0.800 0.750 0.633 

SavingsRate 0.746 0.705 0.679 0.832 0.789 0.755 0.780 0.753 0.707 0.800 0.826 0.798 

SoRRCA 0.472 0.716 0.467 0.703 0.434 0.717 0.211 0.649 

CO2emissions -0.679 -0.687 -0.690 -0.624 -0.689 -0.698


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DOI 10.1007/s10368-010-0168-6 


Sustainability economics, resource efficiency, 

and the Green New Deal 

Lucas Bretschger, ETH Zurich 

Published online: 26 June 2010 

© Springer-Verlag 2010 

Abstract The paper addresses major sustainability issues within a simple general 

framework. It studies energy scarcity and endogenous capital formation 

in the long and medium run. It is shown that energy efficiency depends on 

the sectoral structure of the economy. Accordingly, structural change is an 

efficient way to promote both efficiency and sustainable development. The 

results for the medium run imply that the current crises offer a scope for the 

greening of the economy, provided that policy increases productivity through 

trust-building. However, there are major differences between economic recovery 

and sustainability so that the proposals of the Green New Deal have to be 

evaluated with care. 

Keywords Sustainability · Resource efficiency · Trust · Green New Deal 

JEL Classification Q43 · O47 · Q56 · O41 


The sustainability debate suggests to aim at a long-run development which 

is characterized by non-decreasing living standards, a protection of crucial 

natural resources, and low risks of economic and ecological crises. Economic 

theory can provide basic insights on how such a sustainable path can be 

reached. It can also evaluate the usefulness of concrete proposals for a 

L. Bretschger (B) 

CER-ETH Centre of Economic Research, ETH Zurich, 

ZUE F7, CH-8092 Zurich, Switzerland 

e-mail: lbretschger@ethz.ch

188 L. Bretschger 

sustainable state, like the targets of 2 kW energy use or 1 ton CO2 emissions 

per capita. 

Currently, climate change is the most imminent threat to sustainability. 

The business-as-usual scenario assumes that under laisser faire greenhouse 

gas emissions would rise by 45% by 2030, which would cause an increase in 

the global average temperature of up to 6 ◦ C. According to the Stern Review 

(Stern 2007), the warming could entail losses equivalent to 5–10% of global 

GDP. Poor countries would suffer most with more than 10% losses of GDP. 

Natural resource depletion and the loss of biodiversity are other critical issues 

for long-run sustainability. 

Natural resources affect also the shorter-run development. Recently, we 

have experienced a triple crisis in the fields of food, fuel, and finance. Prices 

for food traded internationally increased by 60% in the first half of 2008, oil 

price peaked at 150 $/barrel, and banking failures caused huge government 

interventions. Trade and per capita income have contracted worldwide in 2009 

which implies one of the major economic downturns of the last decades. 

The combination of these short-run developments with the long-term predictions 

lead to a variety of highly demanding research questions. Which 

mechanisms and activities are crucial to obtain sustainability? How can we 

decrease the long-term exposition to economic and environmental risks? 

Can expansionary governmental policy achieve two goals at the same time: 

stimulate recovery and improve sustainability? 

The transition to a sustainable state implies a decarbonization of the economy 

and lower natural resource use. If welfare is to be sustained or increased 

in the future, the accumulation of man-made inputs consisting of different 

forms of capital has to be strong enough. The larger the saving effort of the 

present generation is, the better it is possible to substitute natural resources in 

production and consumption. The greatest challenge consists in showing that 

history of economic development can be reversed in the future: while in the 

past, low prices for the environment have led to extensive natural resource use 

and rising polluting activities, increasing prices of natural resource use should 

be able to change this general pattern. Corresponding to the concept of the 

Environmental Kuznets Curve (see e.g. Egli and Steger 2007), income should 

rise in the future while natural resource use should decrease. 

Regarding the recent nexus between the crises and green policies there has 

been a widespread call for a “New Deal” as in the 1930s but at a global scale 

and embracing a broader vision, see Barbier (2009). The plan involves a sharp 

reduction in carbon intensity in order to revitalize the world economy on a 

more sustainable basis. Thus it is the aim to apply the same kind of long-run 

instruments for policies of a shorter time horizon. 

The paper addresses these issues within a simple general framework. It 

applies the modelling of “new” resource economics, which includes a full 

characterization of the inherent dynamics and a sectoral structure of the 

economy. The second part concentrates on the medium run and its connection 

with sustainability issues, which are normally regarded as purely long term. It is 

shown that, in the long run, energy efficiency is a crucial issue for sustainability.

Sustainability economics, resource efficiency, and the Green New Deal 189 

However, we also derive that efficiency is not a pure technology parameter 

but depends heavily on the sectoral structure of the economy, which at the 

same time drives long-run growth. The results for the medium run imply that 

only a part of the proposals for the Green New Deal are promising because 

there are major differences between the aims of recovery and sustainability. In 

particular, government investments do not necessarily have the desired effects 

in the medium run. 

The present contribution relates to the basic literature on resource economics 

and growth theory, in particular to Solow (1974a, b), Stiglitz (1974) 

and Dasgupta and Heal (1974). It relies on recent contributions of resource 

economics which have widened our knowledge on sustainability, see 

Bovenberg and Smulders (1995), Barbier (1999), Bretschger (1998, 1999), 

Scholz and Ziemes (1999), Smulders (2000), Grimaud and Rougé (2003), 

Xepapadeas (2006), and López et al. (2007), and Bretschger and Smulders 

(2008). 

The remainder of the paper is organized as follows. Section 2 presents an 

approach to obtain sustainability results with a focus on resource efficiency. In 

Section 3, specific results for the long run are derived. Section 4 introduces the 

elements of medium-run analysis and the Green New Deal. Section 5 shows 

results for the comparative dynamics of the model. Section 6 concludes. 

2 Efficiency focus 

In the following, we develop a general framework to study major sustainability 

issues. The model has some specific features depending on the considered time 

horizon. For the long run, we allow for all possible substitution mechanisms 

between inputs and sectors which characterize the long-term flexibility of a 

market economy. For the medium run, limited substitution between inputs and 

the emergence of business cycles will be the focus of the study. 

We start by analyzing aggregate production and the implications for energy 

efficiency. Instead of adopting a one-sector approach with capital, labor, and 

energy as inputs we assume that production is characterized by a hierarchical 

order as follows: final output is manufactured by “produced” inputs and produced 

inputs are manufactured by primary inputs. This enables us to express 

the different substitution channels in a simple yet comprehensive manner. 

The distinctive feature of the model is that the impact of energy on output 

occurs indirectly, through the produced inputs. It does not mean that energy 

is unimportant for final goods. On the contrary, energy affects all production 

processes, including final goods, but in a more detailed way compared to the 

one-sector model. 

Assume output Y as a function of total factor productivity A and the 

produced inputs capital K and intermediate input Z : 

Y(t) = F � A(t), K(t), Z (t) � 

(1)


with a convenient specification reading: 

Y(t) = A(t)K(t) α Z (t) 1−α 

where t denotes the time index and 0


by the terms of trade. Specifically, a very productive (e.g. energy efficient) 

economy produces a high output which is confronted with demand conditions 

on world markets. In general, higher efficiency increases output which worsens 

the terms of trade, except the domestic economy is very small. This means that 

efficiency affects domestic consumption also through the terms of trade effect. 

In the following, we analyze long-run and medium-run development in 

greater detail. Specifically, the long-run sustainability view is first developed 

and then related to the issue of economic recovery as currently discussed 

in many countries. Here, the relationship between cycles and growth is the 

dominant topic to determine efficiency. This connects the model to the debate 

on the Green New Deal. 

3 Long-run analysis 

Let us now turn to the long-run dynamic aspects of energy efficiency in the 

present framework. We study the effects of decreasing energy input, which 

may be the consequence of climate policies or limited resource supply. With 

hats denoting growth rates and assuming the change of energy input to be 

negative it follows from (5) that for output to grow: 

ˆx ≥−Ê for Y ≥ 0 (7) 

has to hold. Equation 7 says that we can directly calculate the efficiency 

increase ˆx needed for constant or increasing output, as soon as we know the 

change of energy input −Ê. Evidently, for a growing output, efficiency x has 

to rise faster than energy use E decreases. To see the implications, we have to 

study the long-run impact of energy E on output. Logarithmic differentiating 

(2) yields: 

ˆY(t) = Â(t) + α ˆK(t) + (1 − α) ˆZ (t) (8) 

It is important to note that, with limited supply of L and E, Z is bounded 

from above, which follows from (4). 1 That is, we have ˆZ (t) = 0 in the long run. 

However, K is substantially different from Z as it is a stock, which accumulates 

over time. Even with a bounded quantity of primary inputs we can produce an 

increasing stock of capital. Moreover, it is important to note that A and K 

are interlinked by positive spillovers, according to Arrow (1962). This means 

that capital accumulation has a positive impact on factor productivity through 

learning by doing. In order to avoid the scale effect of growth, see Jones (1995) 

and Peretto (2009), we can assume that spillovers are generated through an 

increase of the average capital stock in order to write: 

A(t) = Ã K(t)η 

Z (t) 1−α 

(9) 

1 E is the per-period flow of energy, which is generally limited for non-renewable resources and 

also limited for renewables, provided that they cannot be infinitely expanded, which we assume.


where Ã > 0 is a parameter, 0


an induced change of output in both activities. Specifically, labor moves to 

the sector where wages become (relatively) more attractive which is the sector 

with the higher elasticity of substitution. Provided that substitution possibilities 

are better in capital accumulation than in the production of Z , increasing 

energy scarcity causes L to move from the Z -sector to the capital sector which 

enhances capital accumulation and the growth of energy efficiency and output. 

Therefore, ˆx does not depend on the absolute values of the elasticities of input 

substitution but on their relative values. Poor input substitution elasticities 

are not necessarily detrimental for growth. For sustainability, the elasticity 

of substitution has to be higher in the capital accumulation sector compared 

to the competing sector, which is the Z -sector, see Bretschger and Smulders 

(2008) for a more detailed analysis. Hence, sustainability depends not only on 

input substitution but also on sectoral change, which promotes growth, when 

primary inputs are reallocated towards capital accumulation. 

The model can be extended to more types of capital. Specifically, K can be 

disaggregated into physical, human, and (private) knowledge capital. For these 

different capital types, the described demand and supply effects can be studied 

separately. 3 The interesting feature of this approach is that it has neither 

to assume high elasticities of input substitution or an ever increasing use of 

material input to predict sustainable development, which were the assumptions 

of earlier models criticized by ecologists, see Cleveland and Ruth (1997). 

4 Medium-run analysis 

For the analysis of the medium run, we introduce business cycles and consider 

the effects of zero input substitution. As an additional model element, we 

introduce a variable for the trust level in the economy. We then focus on cycles 

emerging from trust building through capital accumulation. Accordingly, the 

capital build-up is associated with social learning which entails trust and 

confidence. We assume that, besides the long-run positive learning effects 

of capital accumulation, there is also cyclical learning in the economy. Trust 

and confidence gradually build up during a cycle. They reflect broad areas 

such as trust in rules and institutions, the emergence of implicit contracts, 

and the efficiency of additional markets (like the interbank market). These 

issues affect people’s willingness to cooperate and thus the productivities of 

the inputs. 

We can model the emergence and disappearance of trust as an externality, 

like the positive spillovers. Specifically, we assume that the start of a cycle is 

triggered by an exogenous event, e.g. a new technology or a specific policy; 

examples are the appearance of the internet or the home-owning initiative 

of the US government. But then, after a certain time, trust building fades 

3 Empirical evidence suggests that a decrease in energy use fosters investments in physical and 

knowledge capital and is neutral with regard to human capital, see Bretschger (2009).


Fig. 1 Trust and cycle 

Learning-by 

doing spillovers 

Trust 

1 Capital 

so that the additional productivity deteriorates. Thus while the economic 

upswing is achieved through an increasing trust in the new paradigm, the 

economic downturn is due to learning about problems and misjudgements of 

the paradigm. Possibly, new cycles emerge during or after this process. Figure 1 

shows the relationship between capital and learning graphically, during one 

cycle. 

In the following, B j denotes the size of trust in the j th cycle; it is determined 

by positive spillovers from capital accumulation. We have B j = 0 until a technology 

or policy shock occurs (which happens at K = K ¯ j). The development 

of B j is determined by the “trust dissemination rate” κ and the “maximum 

obtainable” trust ¯B j. κ reflects communication within the business community 

and the political sector (e.g. electronic media are assumed to increase κ). ¯B j 

depends on the perceived potential of the new paradigm, i.e. the productivity 

enhancing effect of the new cycle. κ and ¯B j together determine when the cycle 

ends (which happens at K = ¯K j). For simplicity, we assume B ≥ 1 below. 4 

Adopting a logistic form for trust building through capital accumulation we 

get: 

so that 

B j(t) = max{κ · K(t) � 1 − K (t) / ¯K j (t) � , 0}+1 (12) 

¯K j (t) = � 4 ¯B j − 1 � /κ + K ¯ j(t) (13) 

which determines the end point of cycle j and its length, see the Appendix for 

the derivation. 

In the medium run, energy and capital are assumed to be pure complements. 

However, energy-saving investments are now feasible. We define ˜K as: 

˜K(t) = min {B(t) · K(t), D(t) · E(t)} (14) 

where B is given by (12) and j is omitted from now on because there is no 

ambiguity. D is a partial energy efficiency parameter (note that in general 

D �= x). With given technology (fixed D), E and B(t)K(t) are pure complements. 

However, substitution between D and E is possible, the substitution 

elasticity is unity, as usual. ˜K increases with K when E and/or D rise(s). D(t) 

can be increased by research investments. 

4 To take B positive but smaller than unity would be feasible as well.


Moreover, we assume for simplicity in the medium-run analysis that the 

production technologies of Y and K are symmetric and of the Cobb-Douglas 

form. In this way, (3) can be simplified and K accumulates according to: 

where s is the savings rate. A(t) now reads: 

¨K(t) η 

A(t) = Ã 

Z (t) 1−α 

˙K(t) = s · Y(t) − δK(t) (15) 

(16) 

where ¨K is actually used capital ( ¨K < K when BK < DE) and we again divide 

by Z 1−α to eliminate the scale effect. During a cycle, maximum output is 

obtained with B(t) · K(t) = D(t) · E(t), which applies when energy supply is 

fully elastic. Then, the model predicts cyclical energy use. 

Regarding the supply of energy we argue along two possible scenarios. In 

regime 1 (“affluent energy”), energy supply is fully elastic at given energy 

prices ¯pE: 

pE = ¯pE 

(17) 

Growth in regime 1 is then determined by BK = DE, ˜K = BK, and ¨K = K 

so that we obtain: 

Y = ÃB α K α+η 

(18) 

ˆK = sÃB α K α+η−1 − δ (19) 

In regime 2 (“limiting energy”), energy supply is restricted according to: 

E = Ē 

Growth in regime 2 is thus bounded by energy supply Ē. 

Figure 2 exhibits the different possible developments paths for the economy. 

The geometrical loci labelled with Y denote output with Y = ÃB α K α+η in 

regime 1 and Y depending on E in regime 2. The case for regime 1 with 

α + η0) shift development upward, i.e. Y = ÃB α K α+η > Y = Ã (BK) α . The 

cyclical impact of trust is added by the dotted semicircles above the curve. If 

positive learning effects are strong we may have α + η = 1 and get constant 

returns to capital, which leads to the solid straight line for Ys. 5 If energy is 

the limiting factor as in regime 2, output becomes lower (an example is given 

with the dashed line for Yd), with fading energy input and constant D it even 

approaches zero in the long run. When, in addition, temporary energy shocks 

in form of intensified shortages hit the economy (like in the 1970s), output 

5 Trust is not added in this case but used in the following figures.


Fig. 2 Different development 

paths 

Y 

deviates downward (see the dotted downward deviations). As the steady state 

assuming α + η


a b 

sAB 

g 

sAB 

Fig. 4 Impact of subsidies and trust building 

5.1 Regime 1 (affluent energy) 

s A 

δ 

K 

sAB 

When energy supply is fully elastic, we have BK = DE which entails ˜K = BK 

and ¨K = K. Assuming that α + η = 1 we get for capital growth: 

g 

K 

sA 

ˆK ≡ g = sÃB α − δ (21) 

Figure 3 shows the cyclical growth rate of capital graphically. 

Possible policies in the spirit of the Green New Deal are to subsidize savings 

s, to affect trust building κ, to affect depreciation δ or to launch a new cycle B. 

Let us consider the effects in turn. We first show graphical representations of 

the results for the two energy regimes and then discuss the impact of policy in 

a summary at the end of the section. 

When the government decides to subsidize savings s, the direct effect on 

growth is positive but overall growth might still decrease because of shrinking 

B, see Fig. 4a. When the government decides to support trust building in the 

present paradigm (by e.g. reinforcing a paradigm-specific policy) it increases 

growth in the short run but cannot prevent growth from decreasing at the end 

of the cycle, see Fig. 4b. 

Provided that investments are reallocated to more sustainable sectors or 

processes (minergy housing, hybrid cars) it is conceivable to assume that 

depreciation increases in the medium run which harms growth, see Fig. 5a. 6 

Only in the case in which the government is able to start a new trust cycle 

(a new paradigm), growth increases in the short and medium term, see Fig. 5b. 

6 In parallel, employment might get hit because the reallocation of workers can cause adjustment 

costs, but this is not included in the model. 

δ 

K


a b 

Fig. 5 Impact of depreciation and new trust cycle 

5.2 Regime 2 (limiting energy) 

Assuming that BK > DE we get ˜K = DE and ¨K = DE/B < K so that: 

Y = Ã · B −η · (DE) α+η 

ˆY =−η ˆB + (α + η) 

� � 

ˆD + Ê 

(22) 

Increasing trust B now involves a countercyclical effect, i.e. it has a negative 

impact on income and growth (because A depends on ¨K, not on K, see (16)). 

Capital increases according to ˆK = s · ÃB−η (DE) α+η − δ but only investments 

in energy-savings are relevant for output according to: 

˙D = sDY 

= sD · ÃB −η (DE) α+η 

Assuming α + η = 1, output growth is given by: 

ˆY =−η ˆB + ˆD + Ê (23) 

which is represented in Fig. 6, still assuming Ê < 0. 

Fig. 6 Growth in regime 2


a 

Fig. 7 Impact of energy and savings 

b 

Possible policies in the wave of the Green New Deal concern instruments 

to change energy use, to subsidize savings s, and to subsidize energy-saving 

technology through raising sD. To decrease energy use has a negative effect on 

growth in the medium run, see Fig. 7a. 7 Remarkably, rising capital investments 

by increasing s has a negative effect on growth in this case, because capital 

becomes more productive through an increase in trust ( ˆB > 0), so that less 

capital is used and spillovers are reduced, see (23) and Fig. 7b. 

The best policy concerns an improvement of energy saving technologies, 

because it leads to a relaxation of the energy supply constraint and unambiguously 

raises growth, see Fig. 8. 

In regime 2, energy E affects output Y according to 

Y(t) = ¨K(t) η [D(t) · E(t)] α L(t) 1−α 

where ¨K denotes capital in use ( ¨K = DE/B < K). Thus with given ˜K, D, and 

L, output Y directly depends on E. Moreover, decreasing energy input limits 

long-run development prospects (see Fig. 2), provided that improvements in 

energy efficiency B cannot compensate for fading energies. 

5.3 Policy assessment 

From the above results of comparative dynamics we derive that, in a mediumrun 

downturn, increasing the savings rate s and associated capital investments 

through governmental policy shortens the downturn time of the cycle but does 

not necessarily increase (medium-run) income because trust B is decreasing. 

This holds true unless policy is able to increase new trust, i.e. to start a new 

paradigm, where income increases with a new cycle. We have thus to ask how 

likely it is that a new paradigm can arise through the implementation of green 

policies. 

7 This result is not necessarily identical to the long run, see Section 3.


Fig. 8 Impact of higher 

energy efficency 

Increasing capital investments by governmental policy possibly involves two 

further problems. First, it has no impact on long-run income, provided that 

energy is scarce (regime 2). Second, if we are in regime 1, increasing capital 

investments raise energy demand thereby raising exposure to risk of future 

energy supply shortages. 

Increasing energy efficiency by governmental policy supports the development 

of long-run income in regime 2. At the same time, it decreases long-run 

energy demand and reduces the risk in the case of energy shortages as with 

low energy input, the term B(t) · E(t) is dominated by efficiency B(t). When 

energy is abundant (regime 1), increasing energy efficiency by governmental 

policy reduces energy use but does not foster income and growth. 

6 Conclusions 

The model used in this paper provides results for sustainability policies in 

the long and medium run. For the long run, substitution between inputs and, 

above all, between sectors is necessary to move the economy towards higher 

resource efficiency and to enable ongoing growth. Medium-run policies may 

aim at escaping an economic downturn with several measures summarized 

under the title “Green New Deal”. We conclude that, in principle, it is a valid 

point to direct government expenditure toward a greening of the economy, if 

these expenditures are carried out anyway. But it has to be noted that mediumrun 

recovery is not the primary target of sustainability policies. For example, 

with regard to future living standards and risk exposure, sustainability calls for 

policies increasing energy efficiency rather than raising capital investments. 

Assuming that sustainability policies create new trust brings the goals of 

recovery and sustainability in line, as claimed by the Green New Deal. But is it 

realistic? Further problems of large green programmes with huge government 

spending are the lack of mature energy projects (causing low efficiency) and 

possibly high administrative costs. In addition, these policies might carry a 

green label but in fact only help existing industries to survive (like the German 

“scrap premium”). Finally, taxes and permit markets can have similar or better 

effects, without causing a high burden for public budgets.


Except the explanations on the terms of trade effect we did not treat the 

international dimension in this paper. Of course, the state of the environment 

and economic growth are both largely influenced by the economic relations 

between economies and world regions. Thus the combination of dynamics, 

trade and environment is a promising field for further economic research. 

Looking at the existing literature indicates that more interesting results can 

be expected in the future. Many results of growth theory are only valid for 

closed economies; by opening the economies, one should try to confirm, reject 

or refine these model outcomes. 

Appendix 

Calculation of B 

B j(t) = κ · K j(t) − κ · K j (t) 2 / ¯K j (t) + 1 

¯B j : ∂ B j(t) 

= 0 

∂ K j(t) 

⇔ κ = 2 · κ · K j (t) / ¯K j (t) 

⇔ ¯K j (t) = 2 · K j (t) 

⇔ K j (t) = ¯K j (t) /2 

Inserting in the logistic function gives 

¯B j(t) = κ · ¯K j (t) /2 � 1 − ¯K j (t) /2 ¯K j (t) � + 1 

= κ · ¯K j (t) /2 · 1/2 + 1 

= κ · ¯K j (t) /4 + 1 

so that ¯K j (t) = 4( ¯B j − 1)/κ if K j(t) = 0 and ¯K j (t) −K 

K 

¯ ¯ 

j(t) >0 as used in the main text. 

¯ 

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DOI 10.1007/s10368-010-0166-8 


The U.S. proposed carbon tariffs, WTO scrutiny 

and China’s responses 

ZhongXiang Zhang 

Published online: 28 May 2010 


Abstract With governments from around the world trying to hammer out a post- 

2012 climate change agreement, no one would disagree that a U.S. commitment to 

cut greenhouse gas emissions is essential to such a global pact. However, despite 

U.S. president Obama’s announcement to push for a commitment to cut U.S. 

greenhouse gas emissions by 17% by 2020, in reality it is questionable whether U.S. 

This paper is built on the keynote address on Encouraging Developing Country Involvement in a Post- 

2012 Climate Change Regime: Carrots, Sticks or Both? at the Conference on Designing International 

Climate Change Mitigation Policies through RD&D Strategic Cooperation, Catholic University Leuven, 

Belgium, 12 October 2009; the invited presentation on Multilateral Trade Measures in a Post-2012 

Climate Change Regime?: What Can Be Taken from the Montreal Protocol and the WTO? both at the 

International Workshop on Post-2012 Climate and Trade Policies, the United Nations Environment 

Programme, Geneva, 8–9 September 2008 and at Shanghai Forum 2009: Crisis, Cooperation and 

Development, Shanghai, 11–12 May 2009; the invited presentation on Climate Change Meets Trade in 

Promoting Green Growth: Potential Conflicts and Synergies at the East-West Center/Korea Development 

Institute International Conference on Climate Change and Green Growth: Korea’s National Growth 

Strategy, Honolulu, Hawaii, 23–24 July 2009; the invited presentation on NAMAs, Unilateral Actions, 

Registry, Carbon Credits, MRV and Long-term Low-carbon Strategy at International Workshop on 

Envisaging a New Climate Change Agreement in Copenhagen, Seoul, 13 November 2009; and the invited 

panel discussion on Green Growth, Climate Change and WTO at the Korea International Trade 

Association/Peterson Institute for International Economics International Conference on the New Global 

Trading System in the Post-Crisis Era, Seoul, 7 December 2009. It has benefited from useful discussions 

with the participants in these meetings. That said, the views expressed here are those of the author. The 

author bears sole responsibility for any errors and omissions that may remain. 

Z. Zhang 

Research Program, East-West Center, 1601 East-West Road, Honolulu, HI 96848-1601, USA 

Z. Zhang 

Center for Energy Economics and Strategy Studies, Fudan University, Shanghai, China 

Z. Zhang 

Institute of Policy and Management, Chinese Academy of Sciences, Beijing, China 

Z. Zhang 

China Centre for Urban and Regional Development Research, Peking University, Beijing, China 

Z. Zhang (*) 

Center for Environment and Development, Chinese Academy of Social Sciences, Beijing, China 

e-mail: ZhangZ@EastWestCenter.org

204 Z. Zhang 

Congress will agree to specific emissions cuts, although they are not ambitious at all 

from the perspectives of both the EU and developing countries, without the 

imposition of carbon tariffs on Chinese products to the U.S. market, even given 

China’s own announcement to voluntarily seek to reduce its carbon intensity by 40– 

45% over the same period. This dilemma is partly attributed to flaws in current 

international climate negotiations, which have been focused on commitments on the 

two targeted dates of 2020 and 2050. However, if the international climate change 

negotiations continue on their current course without extending the commitment 

period to 2030, which would really open the possibility for the U.S. and China to 

make the commitments that each wants from the other, the inclusion of border carbon 

adjustment measures seems essential to secure passage of any U.S. legislation capping 

its own greenhouse gas emissions. Moreover, the joint WTO-UNEP report indicates that 

border carbon adjustment measures might be allowed under the existing WTO rules, 

depending on their specific design features and the specific conditions for implementing 

them. Against this background, this paper argues that, on the U.S. side, there is a need to 

minimize the potential conflicts with WTO provisions in designing such border carbon 

adjustment measures. The U.S. also needs to explore, with its trading partners, 

ccooperative sectoral approaches to advancing low-carbon technologies and/or 

concerted mitigation efforts in a given sector at the international level. Moreover, to 

increase the prospects for a successful WTO defence of the Waxman-Markey type of 

border adjustment provision, there should be: 1) a period of good faith efforts to reach 

agreements among the countries concerned before imposing such trade measures; 2) 

consideration of alternatives to trade provisions that could reasonably be expected to 

fulfill the same function but are not inconsistent or less inconsistent with the relevant 

WTO provisions; and 3) trade provisions that should allow importers to submit 

equivalent emission reduction units that are recognized by international treaties to cover 

the carbon contents of imported products. Meanwhile, being targeted by such border 

carbon adjustment measures, China needs to, at the right time, indicate a serious 

commitment to address climate change issues to challenge the legitimacy of the U.S. 

imposing carbon tariffs by signaling well ahead that it will take on binding absolute 

emission caps around the year 2030, and needs the three transitional periods of 

increasing climate obligations before taking on absolute emissions caps. This paper 

argues that there is a clear need within a climate regime to define comparable efforts 

towards climate mitigation and adaptation to discipline the use of unilateral trade 

measures at the international level. As exemplified by export tariffs that China applied 

on its own during 2006–08, the paper shows that defining the comparability of climate 

efforts can be to China’s advantage. Furthermore, given the fact that, in volume terms, 

energy-intensive manufacturing in China values 7 to 8 times that of India, and thus 

carbon tariffs have a greater impact on China than on India, the paper questions whether 

China should hold the same stance on this issue as India as it does now, although the two 

largest developing countries should continue to take a common position on other key 

issues in international climate change negotiations. 

Keywords Post-2012 climate negotiations . Border carbon adjustments . 

Carbon tariffs . Emissions allowance requirements . Cap-and-trade regime . 

Lieberman-Warner bill . Waxman-Markey bill . World trade organization . 

Kyoto protocol . China . United States

The U.S. proposed carbon tariffs, WTO scrutiny and China’s responses 205 

JEL classification F18 . Q48 . Q54 . Q56 . Q58 


There is a growing consensus that climate change has the potential to seriously 

damage our natural environment and affect the global economy, thus representing 

the world’s most pressing long-term threat to future prosperity and security. With 

greenhouse gas emissions embodied in virtually all products produced and traded in 

every conceivable economic sector, effectively addressing climate change will 

require a fundamental transformation of our economy and the ways that energy is 

produced and used. This will certainly have a bearing on world trade as it will affect 

the cost of production of traded products and therefore their competitive positions in 

the world market. This climate-trade nexus has become the focus of an academic 

debate (e.g., Bhagwati and Mavroidis 2007; Charnovitz 2003; Ismer and Neuhoff 

2007; Swedish National Board of Trade 2004; The World Bank 2007; Zhang 1998, 

2004, 2007a; Zhang and Assunção 2004), and gains increasing attention as 

governments are taking great efforts to implement the Kyoto Protocol and forge a 

post-2012 climate change regime to succeed it. 

The Intergovernmental Panel on Climate Change (IPCC) calls for developed 

countries to cut their greenhouse gas emissions by 25–40% by 2020 and by 80% by 

2050 relative to their 1990 levels, in order to avoid dangerous climate change 

impacts. In the meantime, under the United Nations Framework Convention on 

Climate Change (UNFCCC) principle of “common but differentiated responsibilities,” 

developing countries are allowed to move at different speeds relative to their developed 

counterparts. This principle is clearly reflected in the Bali roadmap, which requires 

developing countries to take “nationally appropriate mitigation actions … in the context 

of sustainable development, supported and enabled by technology, financing and 

capacity-building, in a measurable, reportable and verifiable manner.” Understandably, 

the U.S. and other industrialized countries would like to see developing countries, in 

particular large developing economies, go beyond that because of concerns about their 

own competitiveness and growing greenhouse gas emissions in developing countries. 

They are considering unilateral trade measures to “induce” developing countries to do 

so. This has been the case in the course of debating and voting on the U.S. congressional 

climate bills capping U.S. greenhouse gas emissions. U.S. legislators have pushed for 

major emerging economies, such as China and India, to take climate actions comparable 

to that of U.S. If they do not, products sold on the U.S. market from these major 

developing countries will have to purchase and surrender emissions allowances to cover 

their carbon contents. These kinds of border carbon adjustment measures have raised 

great concerns about whether they are WTO-consistent and garnered heavy criticism 

from developing countries. 

To date, border adjustment measures in the form of emissions allowance 

requirements (EAR) under the U.S. proposed cap-and-trade regime are the most 

concrete unilateral trade measure put forward to level the carbon playing field. If 

improperly implemented, such measures could disturb the world trade order and 

trigger a trade war. Because of these potentially far-reaching impacts, this paper will 

focus on this type of unilateral border adjustment. It requires importers to acquire

206 Z. Zhang 

and surrender emissions allowances corresponding to the embedded carbon contents 

in their goods from countries that have not taken climate actions comparable to that 

of the importing country. My discussion is mainly on the legality of unilateral EAR 

under the WTO rules. 1 Section 2 briefly describes the border carbon adjustment 

measures proposed in the U.S. legislations. Section 3 deals with the WTO scrutiny 

of EAR proposed in the U.S. congressional climate bills and methodological 

challenges in implementing EAR. With current international climate negotiations 

flawed with a focus on commitments on the two targeted dates of 2020 and 2050, the 

inclusion of border carbon adjustment measures seems essential to secure passage of 

any U.S. climate legislation. Given this, Section 4 discuses how China should 

respond to the U.S. proposed carbon tariffs. The paper ends with some concluding 

remarks on the needs, on the U.S. side, to minimize the potential conflicts with WTO 

provisions in designing such border carbon adjustment measures, and with 

suggestion for China, as the target of such border measures to effectively deal with 

the proposed border adjustment measures to its advantage. 

2 Proposed border adjustment measures in the U.S. climate legislations 

The notion of border carbon adjustments (BCA) is not an American invention. The 

idea of using BCA to address the competitiveness concerns as a result of differing 

climate policy was first floated in the EU, in response to the U.S. withdrawal from 

the Kyoto Protocol. Dominique de Villepin, the then French prime minister, 

proposed in November 2006 for carbon tariffs on goods from countries that had not 

ratified the Kyoto Protocol. He clearly had the U.S. in mind when contemplating 

such proposals aimed to bring the U.S. back to the table for climate negotiations. 

However, Peter Mandelson, the then EU trade commissioner, dismissed the French 

proposal as not only a probable breach of trade rules but also “not good politics” 

(Bounds 2006). As a balanced reflection of the divergent views on this issue, the 

European Commission has suggested that it could implement a “carbon equalization 

system … with a view to putting EU and non-EU producers on a comparable 

footing.” “Such a system could apply to importers of goods requirements similar to 

those applicable to installations within the European Union, by requiring the 

surrender of allowances” (European Commission 2008). In light of this, various 

proposals about carbon equalization systems at the border have been put forward, the 

most recent linked to French president Nicolas Sarkozy’s proposal for “a carbon tax 

at the borders of Europe.” President Sarkozy renewed such a call for a European 

carbon tax on imports when unveiling the details of France’s controversial national 

carbon tax of €17 per ton of CO 2 emissions. He defended his position by citing 

comments from the WTO that such a tax could be compatible with its rules and 

referring to a similar border carbon adjustment provision under the Waxman-Markey 

bill in the U.S. House to be discussed in the next two sections, arguing that “I don’t 

see why the US can do it and Europe cannot” (Hollinger 2009). So far, while the EU 

has considered the possibility of imposing a border allowance adjustment should 

serious leakage issues arise in the future, it has put this option on hold at least until 

1 See Reinaud (2008) for a review of practical issues involved in implementing unilateral EAR.


2012. The European Commission has proposed using temporary free allocations to 

address competitiveness concerns in the interim. Its aim is to facilitate a post-2012 

climate negotiation while keeping that option in the background as a last resort. 

Interestingly, the U.S. legislators have not only embraced such BCA measures 

that they opposed in the past, but have also focused on their design issues in more 

details. In the U.S. Senate, the Boxer Substitute of the Lieberman-Warner Climate 

Security Act (S. 3036) mandates that starting from 2014 importers of products 

covered by the cap-and-trade scheme would have to purchase emissions allowances 

from an International Reserve Allowance Programme if no comparable climate 

action were taken in the exporting country. Least developed countries and countries 

that emit less than 0.5% of global greenhouse gas emissions (i.e., those not 

considered significant emitters) would be excluded from the scheme. Given that 

most carbon-intensive industries in the U.S. run a substantial trade deficit (Houser et 

al. 2008), this proposed EAR clearly aims to level the carbon playing field for 

domestic producers and importers. In the U.S. House of Representatives, the 

American Clean Energy and Security Act of 2009 (H.R. 2998), 2 sponsored by Reps. 

Henry Waxman (D-CA) and Edward Markey (D-MA), was narrowly passed on 26 

June 2009. The so-called Waxman-Markey bill sets up an “International Reserve 

Allowance Program” whereby U.S. importers of primary emission-intensive 

products from countries having not taken “greenhouse gas compliance obligations 

commensurate with those that would apply in the United States” would be required 

to acquire and surrender carbon emissions allowances. The EU by any definition 

would pass this comparability test, because it has taken under the Kyoto Protocol 

and is going to take in its follow-up regime much more ambitious climate targets 

than U.S. Because all other remaining Annex 1 countries but the U.S. have accepted 

mandatory emissions targets under the Kyoto Protocol, these countries would likely 

pass the comparability test as well, which exempts them from EAR under the U.S. 

cap-and-trade regime. While France targeted the American goods, the U.S. EAR 

clearly targets major emerging economies, such as China and India. 

3 WTO scrutiny of U.S. congressional climate bills 

The import emissions allowance requirement was a key part of the Lieberman- 

Warner Climate Security Act of 2008, and will re-appear again as the U.S. Senate 

debates and votes its own version of a climate change bill in 2010 after the U.S. 

House of Representatives narrowly passed the Waxman-Markey bill in June 2009. 

Moreover, concerns raised in the Lieberman-Warner bill seem to have provided 

references to writing relevant provisions in the Waxman-Markey bill to deal with the 

competitiveness concerns. For these reasons, I start with the Lieberman-Warner bill. 

A proposal first introduced by the International Brotherhood of Electrical Workers 

(IBEW) and American Electric Power (AEP) in early 2007 would require importers 

to acquire emission allowances to cover the carbon content of certain products from 

countries that do not take climate actions comparable to that of the U.S. (Morris and 

2 

H.R. 2998, available at: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h2998ih.txt.pdf.

208 Z. Zhang 

Hill 2007). The original version of the Lieberman-Warner bill incorporated this 

mechanism, threatening to punish energy-intensive imports from developing 

countries by requiring importers to obtain emission allowance, but only if they 

had not taken comparable actions by 2020, eight years after the effective start date of 

a U.S. cap-and-trade regime begins. It was argued that the inclusion of trade 

provisions would give the U.S. additional diplomatic leverage to negotiate 

multilaterally and bilaterally with other countries on comparable climate actions. 

Should such negotiations not succeed, trade provisions would provide a means of 

leveling the carbon playing field between American energy-intensive manufacturers 

and their competitors in countries not taking comparable climate actions. Not only 

would the bill have imposed an import allowance purchase requirement too quickly, 

it would have also dramatically expanded the scope of punishment: almost any 

manufactured product would potentially have qualified. If strictly implemented, such 

a provision would pose an insurmountable hurdle for developing countries (The 

Economist 2008). 

It should be emphasized that the aim of including trade provisions is to facilitate 

negotiations while keeping open the possibility of invoking trade measures as a last 

resort. The latest version of the Lieberman-Warner bill has brought the deadline 

forward to 2014 to gain business and union backing. 3 The inclusion of trade 

provisions might be considered the “price” of passage for any U.S. legislation 

capping its greenhouse gas emissions. Put another way, it is likely that no climate 

legislation can move through U.S. Congress without including some sort of trade 

provisions. An important issue on the table is the length of the grace period to be 

granted to developing countries. While many factors need to be taken into 

consideration (Haverkamp 2008), further bringing forward the imposition of 

allowance requirements to imports is rather unrealistic, given the already very short 

grace period ending 2019 in the original version of the bill. It should be noted that 

the Montreal Protocol on Substances that Deplete the Ozone Layer grants 

developing countries a grace period of 10 years (Zhang 2000). Given that the scope 

of economic activities affected by a climate regime is several orders of magnitude 

larger than those covered by the Montreal Protocol, if legislation incorporates border 

adjustment measures (put the issue of their WTO consistency aside), in my view, 

they should not be invoked for at least 10 years after mandatory U.S. emission 

targets take effect. 

Moreover, unrealistically shortening the grace period granted before resorting to 

the trade provisions would increase the uncertainty of whether the measure would 

withstand a challenge by U.S. trading partners before the WTO. As the ruling in the 

Shrimp-Turtle dispute indicates (see Box 2), for a trade measure to be considered 

WTO-consistent, a period of good-faith efforts to reach agreements among the 

countries concerned is needed before imposing such trade measures. Put another 

way, trade provisions should be preceded by major efforts to negotiate with partners 

within a reasonable timeframe. Furthermore, developing countries need a reasonable 

length of time to develop and operate national climate policies and measures. Take 

3 This is in line with the IBEW/AEP proposal, which requires U.S. importers to submit allowances to 

cover the emissions produced during the manufacturing of those goods two years after U.S. starts its capand-trade 

program (McBroom 2008).


the establishment of an emissions trading scheme as a case in point. Even for the 

U.S. SO2 Allowance Trading Program, the entire process from the U.S. 

Environmental Protection Agency beginning to compile the data for its allocation 

database in 1989 to publishing its final allowance allocations in March 1993 took 

almost four years. For the first phase of the EU Emissions Trading Scheme, the 

entire process took almost 2 years from the EU publishing the Directive establishing 

a scheme for greenhouse gas emission allowance trading on 23 July 2003 to it 

approving the last national allocation plan for Greece on 20 June 2005. For 

developing countries with very weak environmental institutions and that do not have 

dependable data on emissions, fuel uses and outputs for installations, this allocation 

process is expected to take much longer than what experienced in the U.S. and the 

EU (Zhang 2007b). 

Box 1 Core WTO principles 

GATT Article 1 (‘most favored nation’ treatment): WTO members not allowed to discriminate against like 

imported products from other WTO members 

GATT Article III (‘national treatment’): Domestic and like imported products treated identically, including 

any internal taxes and regulations 

GATT Article XI (‘elimination of quantitative restrictions’): Forbids any restrictions (on other WTO 

members) in the form of bans, quotas or licenses 

GATT Article XX 

“Subject to the requirement that such measures are not applied in a manner which would constitute a 

means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or 

a disguised restriction on international trade, nothing in this Agreement shall be constructed to prevent the 

adoption or enforcement by any contracting party of measures… 

(b) necessary to protect human, animal or plant life or health; … 

(g) relating to the conservation of exhaustible natural resources if such measures are made effective in 

conjunction with restrictions on domestic production or consumption; ...” 

The threshold for (b) is higher than for (g), because, in order to fall under (b), the measure must be 

“necessary”, rather than merely “relating to” under (g). 

Box 2 Implications of the findings of WTO the shrimp-turtle dispute 

To address the decline of sea turtles around the world, in 1989 the U.S. Congress enacted Section 609 of 

Public Law 101-162 to authorize embargoes on shrimp harvested with commercial fishing technology 

harmful to sea turtles. The U.S. was challenged in the WTO by India, Malaysia, Pakistan and Thailand in 

October 1996, after embargoes were leveled against them. The four governments challenged this measure, 

asserting that the U.S. could not apply its laws to foreign process and production methods. A WTO 

Dispute Settlement Panel was established in April 1997 to hear the case. The Panel found that the U.S. 

failed to approach the complainant nations in serious multilateral negotiations before enforcing the U.S. 

law against those nations. The Panel held that the U.S. shrimp embargo was a class of measures of 

processes-and-production-methods type and had a serious threat to the multilateral trading system because 

it conditioned market access on the conservation policies of foreign countries. Thus, it cannot be justified 

under GATT Article XX. However, the WTO Appellate Body overruled the Panel’s reasoning. The 

Appellate Body held that a WTO member requires from exporting countries compliance, or adoption of, 

certain policies prescribed by the importing country does not render the measure inconsistent with the 

WTO obligation. Although the Appellate Body still found that the U.S. shrimp embargo was not justified 

under GATT Article XX, the decision was not on ground that the U.S. sea turtle law itself was not 

inconsistent with GATT. Rather, the ruling was on ground that the application of the law constituted 

“arbitrary and unjustifiable discrimination” between WTO members (WTO 1998). The WTO Appellate 

Body pointed to a 1996 regional agreement reached at the U.S. initiation, namely the Inter-American

210 Z. Zhang 

Convention on Protection and Conservation of Sea Turtles, as evidence of the feasibility of such an 

approach (WTO 1998; Berger 1999). Here, the Appellate Body again advanced the standing of 

multilateral environmental treaties (Zhang 2004; Zhang and Assunção 2004). Thus, it follows that this 

trade dispute under the WTO may have been interpreted as a clear preference for actions taken pursuant to 

multilateral agreements and/or negotiated through international cooperative arrangements, such as the 

Kyoto Protocol and its successor. However, this interpretation should be with great caution, because there 

is no doctrine of stare decisis (namely, “to stand by things decided”) in the WTO; the GATT/WTO panels 

are not bound by previous panel decisions (Zhang and Assunção 2004). 

Moreover, the WTO Shrimp-Turtle dispute settlement has a bearing on the ongoing discussion on the 

“comparability” of climate actions in a post-2012 climate change regime. The Appellate Body found that 

when the U.S. shifted its standard from requiring measures essentially the same as the U.S. measures to 

“the adoption of a program comparable in effectiveness”, this new standard would comply with the WTO 

disciplines (WTO 2001, paragraph 144). Some may view that this case opens the door for U.S. climate 

legislation that bases trade measures on an evaluation of the comparability of climate actions taken by 

other trading countries. Comparable action can be interpreted as meaning action comparable in effect as 

the “comparable in effectiveness” in the Shrimp-Turtle dispute. It can also be interpreted as meaning “the 

comparability of efforts”. The Bali Action Plan adopts the latter interpretation, using the terms comparable 

as a means of ensuring that developed countries undertake commitments comparable to each other 

(Zhang 2009a). 

In the case of a WTO dispute, the question will arise whether there are any 

alternatives to trade provisions that could be reasonably expected to fulfill the same 

function but are not inconsistent or less inconsistent with the relevant WTO 

provisions. Take the GATT Thai cigarette dispute as a case in point. Under 

Section 27 of the Tobacco Act of 1966, Thailand restricted imports of cigarettes and 

imposed a higher tax rate on imported cigarettes when they were allowed on the 

three occasions since 1966, namely in 1968–70, 1976 and 1980. After consultations 

with Thailand failed to lead to a solution, the U.S. requested in 1990 the Dispute 

Settlement Panel to rule on the Thai action on the grounds that it was inconsistent 

with Article XI:1 of the General Agreement; was not justified by the exception under 

Article XI:2(c), because cigarettes were not an agricultural or fisheries product in 

the meaning of Article XI:1; and was not justified under Article XX(b) because the 

restrictions were not necessary to protect human health, i.e. controlling the 

consumption of cigarettes did not require an import ban. The Dispute Settlement 

Panel ruled against Thailand. The Panel found that Thailand had acted inconsistently 

with Article XI:1 for having not granted import licenses over a long period of time. 

Recognizing that XI:2(c) allows exceptions for fisheries and agricultural products if 

the restrictions are necessary to enable governments to protect farmers and fishermen 

who, because of the perishability of their produce, often could not withhold excess 

supplies of the fresh product from the market, the Panel found that cigarettes were 

not “like” the fresh product as leaf tobacco and thus were not among the products 

eligible for import restrictions under Article XI:2(c). Moreover, the Panel 

acknowledged that Article XX(b) allowed contracting parties to give priority to 

human health over trade liberalization. The Panel held the view that the import 

restrictions imposed by Thailand could be considered to be “necessary” in terms of 

Article XX(b) only if there were no alternative measure consistent with the General 

Agreement, or less inconsistent with it, which Thailand could reasonably be 

expected to employ to achieve its health policy objectives. However, the Panel found 

the Thai import restriction measure not necessary because Thailand could reasonably 

be expected to take strict, non-discriminatory labelling and ingredient disclosure


regulations and to ban all the direct and indirect advertising, promotion and 

sponsorship of cigarettes to ensure the quality and reduce the quantity of cigarettes 

sold in Thailand. These alternative measures are considered WTO-consistent to 

achieve the same health policy objectives as Thailand now pursues through an 

import ban on all cigarettes whatever their ingredients (GATT 1990). Simply put, in 

the GATT Thai cigarette dispute, the Dispute Settlement Panel concluded that 

Thailand had legitimate concerns with health but it had measures available to it other 

than a trade ban that would be consistent with the General Agreement on Tariffs and 

Trade (e.g. bans on advertising) (GATT 1990). 

Indeed, there are alternatives to resorting to trade provisions to protect the U.S. 

trade-sensitive, energy-intensive industries during a period when the U.S. is taking 

good-faith efforts to negotiate with trading partners on comparable actions. One way 

to address competitiveness concerns is to initially allocate free emission allowances 

to those sectors vulnerable to global competition, either totally or partially. 4 

Bovenberg and Goulder (2002) found that giving out about 13% of the allowances 

to fossil fuel suppliers freely instead of auctioning in an emissions trading scheme in 

the U.S. would be sufficient to prevent their profits with the emissions constraints 

from falling in comparison with those without the emissions constraints. 

There is no disagreement that the allocation of permits to emissions sources is a 

politically contentious issue. Grandfathering, or at least partially grandfathering, 

helps these well-organized, politically highly-mobilized industries or sectors to save 

considerable expenditures and thus increases the political acceptability of an 

emissions trading scheme, although it leads to a higher economic cost than a policy 

where the allowances are fully auctioned. 5 This explains why the sponsors of the 

American Clean Energy and Security Act of 2009 had to make a compromise 

amending the Act to auction only 15% of the emission permits instead of the initial 

proposal for auctioning all the emission permits in a proposed cap-and-trade regime. 

This change allowed the Act to pass the U.S. House of Representatives Energy and 

Commerce Committee in May 2009. However, it should be pointed out that although 

grandfathering is thought of as giving implicit subsidies to these sectors, grandfathering 

is less trade-distorted than the exemptions from carbon taxes (Zhang 1998, 

1999), which means that partially grandfathering is even less trade-distorted than the 

exemptions from carbon taxes. To understand their difference, it is important to bear 

in mind that grandfathering itself also implies an opportunity cost for firms receiving 

permits: what matters here is not how firms get your permits, but what firms can sell 

4 To be consistent with the WTO provisions, foreign producers could arguably demand the same 

proportion of free allowances as U.S. domestic producers in case they are subject to border carbon 

adjustments. 

5 In a second-best setting with pre-existing distortionary taxes, if allowances are auctioned, the revenues 

generated can then be used to reduce pre-existing distortionary taxes, thus generating overall efficiency 

gains. Parry et al. (1999), for example, show that the costs of reducing U.S. carbon emissions by 10% in a 

second-best setting with pre-existing labor taxes are five times more costly under a grandfathered carbon 

permits case than under an auctioned case. This is because the policy where the permits are auctioned 

raises revenues for the government that can be used to reduce pre-existing distortionary taxes. By contrast, 

in the former case, no revenue-recycling effect occurs, since no revenues are raised for the government. 

However, the policy produces the same tax-interaction effect as under the latter case, which tends to 

reduce employment and investment and thus exacerbates the distortionary effects of pre-existing taxes 

(Zhang 1999).

212 Z. Zhang 

them for—that is what determines opportunity cost. Thus, even if permits are 

awarded gratis, firms will value them at their market price. Accordingly, the prices of 

energy will adjust to reflect the increased scarcity of fossil fuels. This means that 

regardless of whether emissions permits are given out freely or are auctioned by the 

government, the effects on energy prices are expected to be the same, although the 

initial ownership of emissions permits differs among different allocation methods. 

As a result, relative prices of products will not be distorted relative to their preexisting 

levels and switching of demand towards products of those firms whose 

permits are awarded gratis (the so-called substitution effect) will not be induced by 

grandfathering. This makes grandfathering different from the exemptions from 

carbon taxes. In the latter case, there exist substitution effects (Zhang 1998, 1999). 

For example, the Commission of the European Communities (CEC) proposal for a 

mixed carbon and energy tax 6 provides for exemptions for the six energy-intensive 

industries (i.e., iron and steel, non-ferrous metals, chemicals, cement, glass, and pulp 

and paper) from coverage of the CEC tax on grounds of competitiveness. This not 

only reduces the effectiveness of the CEC tax in achieving its objective of reducing 

CO2 emissions, but also makes the industries, which are exempt from paying the 

CEC tax, improve their competitive position in relation to those industries which are 

not. Therefore, there will be some switching of demand towards the products of 

these energy-intensive industries, which is precisely the reaction that such a tax 

should avoid (Zhang 1997). 

The import allowance requirement approach would distinguish between two 

otherwise physically identical products on the basis of climate actions in place in the 

country of origin. This discrimination of like products among trading nations would 

constitute a prima facie violation of WTO rules. To pass WTO scrutiny of trade 

provisions, the U.S. is likely to make reference to the health and environmental 

exceptions provided under GATT Article XX (see Box 1). This Article itself is the 

exception that authorizes governments to employ otherwise GATT-illegal measures 

when such measures are necessary to deal with certain enumerated public policy 

problems. The GATT panel in Tuna/Dolphin II concluded that Article XX does not 

preclude governments from pursuing environmental concerns outside their national 

territory, but such extra-jurisdictional application of domestic laws would be 

permitted only if aimed primarily (emphasis added) at having a conservation or 

protection effect (GATT 1994; Zhang 1998). The capacity of the planet’s atmosphere 

to absorb greenhouse gas emissions without adverse impacts is an ‘exhaustible 

natural resource.’ Thus, if countries take measures on their own including extrajurisdictional 

application primarily to prevent the depletion of this ‘exhaustible 

natural resource,’ such measures will have a good justification under GATT Article 

XX. Along this reasoning, if the main objective of trade provisions is to protect the 

environment by requiring other countries to take actions comparable to that of the U. 

S., then mandating importers to purchase allowances from the designated special 

6 As part of its comprehensive strategy to control CO2 emissions and increase energy efficiency, a carbon/ 

energy tax has been proposed by the CEC. The CEC proposal is that member states introduce a carbon/ 

energy tax of US$ 3 per barrel oil equivalent in 1993, rising in real terms by US$ 1 a year to US$ 10 per 

barrel in 2000. After the year 2000 the tax rate will remain at US$ 10 per barrel at 1993 prices. The tax 

rates are allocated across fuels, with 50% based on carbon content and 50% on energy content (Zhang 

1997).


international reserve allowance pool to cover the carbon emissions associated with 

the manufacture of that product is debatable. To increase the prospects for a 

successful WTO defense, I think that trade provisions can refer to the designated 

special international reserve allowance pool, but may not do without adding “or 

equivalent.” This will allow importers to submit equivalent emission reduction units 

that are not necessarily allowances but are recognized by international treaties to 

cover the carbon contents of imported products. 

Clearly, these concerns raised in the Lieberman-Warner bill have shaped relevant 

provisions in the Waxman-Markey bill to deal with the competitiveness and leakage 

concerns. Accordingly, the Waxman-Markey bill has avoided all the aforementioned 

controversies raised in the Lieberman-Warner bill. Unlike the EAR in the 

Lieberman-Warner bill which focuses exclusively on imports into the U.S., but 

does nothing to address the competitiveness of U.S. exports in foreign markets, the 

Waxman-Markey bill included both rebates for few energy-intensive, trade-sensitive 

sectors 7 and free emission allowances to help not to put U.S. manufacturers at a 

disadvantage relative to overseas competitors. Unlike the Lieberman-Warner bill in 

the U.S. Senate, the Waxman-Markey bill also gives China, India and other major 

developing nations time to enact their climate-friendly measures. Under the 

Waxman-Markey bill, the International Reserve Allowance Program may not begin 

before January 1, 2025. The U.S. president may only implement an International 

Reserve Allowance Program for sectors producing primary products. While the bill 

called for a “carbon tariff” on imports, it very much framed that measures as a last 

resort that a U.S. president could impose at his or her discretion regarding border 

adjustments or tariffs. However, in the middle of the night before the vote on June 

26, 2009, a provision was inserted in this House bill that requires the President, 

starting in 2020, to impose a border adjustment—or tariffs—on certain goods from 

countries that do not act to limit their greenhouse gas emissions. The President can 

waive the tariffs only if he receives explicit permission from U.S. Congress (Broder 

2009). The last-minute changes in the bill changed a Presidential long-term back-up 

option to a requirement that the President put such tariffs in place under the specified 

conditions. Such changes significantly changed the spirit of the bill, moving it 

considerably closer to risky protectionism. While praising the passage of the House 

bill as an “extraordinary first step,” president Obama opposed a trade provision in 

that bill. 8 The carbon tariff proposals have also drawn fierce criticism from China 

and India. Without specific reference to the U.S. or the Waxman-Markey bill, 

China’s Ministry of Commerce said in a statement posted on its website that 

proposals to impose “carbon tariffs” on imported products will violate the rules of 

the World Trade Organization. That would enable developed countries to “resort to 

trade in the name of protecting the environment.” The carbon tariff proposal runs 

against the principle of “common but differentiated responsibilities,” the spirit of the 

Kyoto Protocol. This will neither help strengthen confidence that the international 

7 

See Genasci (2008) for discussion on complicating issues related to how to rebate exports under a capand-trade 

regime. 

8 

President Obama was quoted as saying that “At a time when the economy worldwide is still deep in 

recession and we’ve seen a significant drop in global trade, I think we have to be very careful about 

sending any protectionist signals out there. I think there may be other ways of doing it than with a tariff 

approach.” (Broder 2009).

214 Z. Zhang 

community can cooperate to handle the (economic) crisis, nor help any country’s 

endeavors during the climate change negotiations. Thus China is strongly opposed to 

it (MOC of China 2009). 

On 30 September 2009, Senators John Kerry (D-MA) and Barbara Boxer 

(D-CA) introduced the Clean Energy Jobs and American Power Act (S. 1733), 

the Senate version of the Waxman-Markey bill in the House. Unlike in the 

House where a simple majority is needed to pass a legislation, the Senate needs 

60 votes from its 100 members to ensure passage. With two senators per state no 

matter how small, coal-producing, industrial and agricultural states are more 

heavily represented in the Senate than in the House. Thus the Kerry-Boxer bill 

faces an uphill battle in the Senate. As would be expected, senators from those 

states will push for even tougher border carbon adjustment provisions that would 

potentially tax foreign goods at a higher rate if they come from countries that are 

not taking steps comparable to that of the U.S., which will most likely add to the 

cost of goods. At this stage the bill proposes to include some form of BCAs, but 

details still need to be worked out. While Senator Kerry indicates that the 

proposed provision would comply with the WTO rules, it remains to be seen 

how the bill, which is put off until Spring 2010 (Talley 2009), is going to 

reconcile potential conflicts between demands for tough border carbon adjustment 

provisions from coal-producing, industrial and agricultural states and the U.S. 

international obligations under WTO. 

Besides the issue of WTO consistency, there will be methodological challenges in 

implementing an EAR under a cap-and-trade regime, although such practical 

implementation issues are secondary concerns. Identifying the appropriate carbon 

contents embodied in traded products will present formidable technical difficulties, 

given the wide range of technologies in use around the world and very different 

energy resource endowments and consumption patterns among countries. In the 

absence of any information regarding the carbon content of the products from 

exporting countries, importing countries, the U.S. in this case, could adopt either of 

the two approaches to overcoming information challenges in practical implementation. 

One is to prescribe the tax rates for the imported product based on U.S. 

domestically predominant method of production for a like product, which sets the 

average embedded carbon content of a particular product (Zhang 1998; Zhang and 

Assunção 2004). This practice is by no means without foundation. For example, the 

U.S. Secretary of the Treasury has adopted the approach in the tax on imported toxic 

chemicals under the Superfund Tax (GATT 1987; Zhang 1998). An alternative is to 

set the best available technology (BAT) as the reference technology level and then 

use the average embedded carbon content of a particular product produced with the 

BAT in applying border carbon adjustments (Ismer and Neuhoff 2007). Generally 

speaking, developing countries will bear a lower cost based on either of the 

approaches than using the nation-wide average carbon content of imported products 

for the country of origin, given that less energy-efficient technologies in developing 

countries produce products of higher embedded carbon contends than those like 

products produced by more energy-efficient technologies in the U.S. However, to be 

more defensible, either of the approaches should allow foreign producers to 

challenge the carbon contents applied to their products to ensure that they will not 

pay for more than they have actually emitted.


4 How should China respond to the U.S. proposed carbon tariffs? 

So far, the discussion has been focused on the U.S. which is considering unilateral 

trade measures. Now that the inclusion of border carbon adjustment measures is 

widely considered essential to secure passage of any U.S. climate legislation, the 

question is then how China should respond to the U.S. proposed carbon tariffs. 

4.1 A serious commitment to find a global solution to the threat of climate change 

First of all, China needs to creditably indicate a serious commitment to address 

climate change issues to challenge the legitimacy of the U.S. imposing carbon tariffs. 

Indeed, if China’s energy use and the resulting carbon emissions had followed their 

trends between 1980 and 2000, during which China achieved a quadrupling of its 

GDP with only a doubling of energy consumption (Zhang 2003), rather than surged 

since 2002, then the position of China in the international climate debate would be 

very different from what it is today. On the trends of the 1980s and 1990s, the U.S. 

Energy Information Administration (EIA 2004) estimated that China’s CO2 

emissions were not expected to catch up with the world’s largest carbon emitter by 

2030. However, China’s energy use has surged since the turn of this century, almost 

doubling between 2000 and 2007. Despite similar rates of economic growth, the rate 

of growth in China’s energy use during this period (9.74% per year) has been more 

than twice that of the last two decades in the past century (4.25% per year) (National 

Bureau of Statistics of China 2008). As a result, China was already the world’s 

largest carbon emitter in 2007, instead of “until 2030” as estimated as late as 2004. 

It is conceivable that China will argue that its high absolute emission levels are 

the combined effects of a large population and coal-fueled economy and the 

workshop of the world, the latter of which leads to a hefty chunk of China’s 

emissions embedded in goods that are exported to industrialized countries (Zhang 

2009c). China’s arguments are legitimate. The country has every right to do that. 

Anyhow, China’s share of the world’s cumulative energy-related CO2 emissions was 

only 8% from 1900 to 2005, far less than 30% for the U.S., and is still projected to 

be lower than those for the U.S. in 2030. On a per capita basis, China’s CO 2 

emissions are currently only one-fifth of that of the U.S., and are still anticipated to 

be less than half of that of the U.S. in 2030 (IEA 2007). However, the number one 

position, in absolute terms, has put China in the spotlight just at a time when the 

world’s community starts negotiating a post-Kyoto climate regime under the Bali 

Roadmap. There are renewed interests in and debates on China’s role in combating 

global climate change. 

Given the fact that China is already the world’s largest carbon emitter and its 

emissions continue to rise rapidly in line with its industrialization and urbanization, 

China is seen to have greater capacity, capability and responsibility. The country is 

facing great pressure both inside and outside international climate negotiations to 

exhibit greater ambition. As long as China does not signal well ahead the time when 

it will take on the emissions caps, it will always be confronted with the threats of 

trade measures. In response to these concerns and to put China in a positive position, 

I propose that at current international climate talks China should negotiate a 

requirement that greenhouse gas emissions in industrialized countries be cut at least

216 Z. Zhang 

by 80% by 2050 relative to their 1990 levels and that per capita emissions for all 

major countries by 2050 should be no more than the world’s average at that time. 

Moreover, it would be in China’s own best interest if, at the right time (e.g., at a time 

when the U.S. Senate is going to debate and ratify any global deal that would emerge 

from Copenhagen or later), China signals well ahead that it will take on binding 

absolute emission caps around the year 2030. 

4.1.1 Why around 2030 for timing China’s absolute emissions caps? 

Many factors need to be taken into consideration in determining the timing for China 

to take on absolute emissions caps. Taking the commitment period of 5 years as the 

Kyoto Protocol has adopted, I think the fifth commitment period (2028–2032), or 

around 2030 is not an unreasonably expected date on which China needs to take on 

absolute emissions caps for the following reasons. While this date is later than the 

time frame that the U.S. and other industrialized countries would like to see, it would 

probably still be too soon from China’s perspective. 

First, the fourth assessment report of the IPCC recommends that global 

greenhouse gas emissions should peak by 2020 at the latest and then turn 

downward, to avoid dangerous climate change consequences. With China already 

the world’s largest carbon emitter, the earlier China takes on emissions caps, the 

more likely that goal can be achieved. However, given China’s relatively low 

development stage and its rapidly growing economy fueled by coal, its carbon 

emissions are still on the climbing trajectories beyond 2030, even if some energy 

saving policies and measures have been factored into such projections. 

Second, before legally binding commitments become applicable to Annex I 

(industrialized) countries, they have a grace period of 16 years starting from the 

Earth Summit in June 1992 when Annex I countries promised to individually or 

jointly stabilize greenhouse gases emissions at their 1990 levels by the end of the 

past century to the beginning of the first commitment period in 2008. This precedent 

points to a first binding commitment period for China starting around 2026. 

Third, with China still dependent on coal to meet the bulk of its energy needs for 

the next several decades, the commercialization and widespread deployment of 

carbon capture and storage (CCS) is a crucial option for reducing both China’s and 

global CO2 emissions. Thus far, CCS has not been commercialized anywhere in the 

world, and it is unlikely, given current trends, that this technology will find largescale 

application either in China or elsewhere before 2030. Until CCS projects are 

developed to the point of achieving economies of scale and bringing down the costs, 

China will not feel confident about committing to absolute emissions caps. 

Fourth, developing countries need reasonable time to develop and operate 

national climate policies and measures. This is understood by knowledgeable U.S. 

politicians, such as Reps. Henry Waxman (D-CA) and Edward Markey (D-MA), the 

sponsors of the American Clean Energy and Security Act of 2009. Indeed, the 

Waxman-Markey bill gives China, India and other major developing nations time to 

enact climate-friendly measures. While the bill called for a “carbon tariff” on 

imports, it very much framed that measures as a last resort that a U.S. president 

could impose at his or her discretion not until 1 January 2025 regarding border 

adjustments or tariffs, although in the middle of the night before the vote on 26 June


2009, a compromise was made to further bring forward the imposition of carbon 

tariffs. 

Fifth, another timing indicator is a lag between the date that a treaty is signed and 

the starting date of the budget period. With the Kyoto Protocol signing in December 

1997 and the first budget period staring 2008, the earliest date to expect China to 

introduce binding commitments would not be before 2020. Even without this 

precedent for Annex I countries, China’s demand is by no means without foundation. 

For example, the Montreal Protocol on Substances that Deplete the Ozone Layer 

grants developing countries a grace period of 10 years (Zhang 2000). Given that the 

scope of economic activities affected by a climate regime is several orders of 

magnitude larger than those covered by the Montreal Protocol, it is arguable that 

developing countries should have a grace period much longer than 10 years, after 

mandatory emission targets for Annex I countries took effect in 2008. 

Sixth, while it is not unreasonable to grant China a grace period before taking on 

emissions caps, it would hardly be acceptable to delay the timing beyond 2030. 

China is already the world’s largest carbon emitter and, in 2010 it will overtake 

Japan as the world’s second largest economy, although its per capita income and 

emissions are still very low. After another 20 years of rapid development, China’s 

economy will approach that of the world’s second-largest emitter (the U.S.) in size, 

whereas China’s absolute emissions are well above those of number two. Its baseline 

carbon emissions in 2030 are projected to reach 11.6 billion tons of carbon dioxide, 

relative to 5.5 billion tons for the U.S. and 3.4 billion tons for India (IEA 2009), the 

world’s most populous country at that time (UNDESA 2009). 9 This gap with the U. 

S. could be even bigger, provided that the U.S. would cut its emissions to the levels 

proposed by the Obama administration and under the American Clean Energy and 

Security Act of 2009. By then, China’s per capita income will reach a very 

reasonable level, whereas its per capita emissions of 8.0 tons of carbon dioxide are 

projected to be well above the world’s average of 4.9 tons of carbon dioxide and 

about 3.4 times that of India (IEA 2009). While the country is still on the climbing 

trajectory of carbon emissions under the business as usual scenario, China will have 

lost ground by not taking on emissions caps when the world is facing ever alarming 

climate change threats and developed countries will have achieved significant 

emissions reductions by then. 

4.1.2 Three transitional periods of increasing climate obligations 

It is hard to imagine how China could apply the brakes so sharply as to switch from 

rapid emissions growth to immediate emissions cuts, without passing through 

several intermediate phases. After all, China is still a developing country right now, 

no matter how rapidly it is expected to grow in the future. Taking the commitment 

period of five years as the Kyoto Protocol has adopted, I envision that China needs 

the following three transitional periods of increasing climate obligations, before 

taking on absolute emissions caps. 

9 UNDESA (2009) projects that China’s population would peak at 1,462.5 millions around 2030, while 

India’s population would be projected to be at 1,484.6 millions in 2030 and further grow to 1,613.8 

millions in 2050.

218 Z. Zhang 

First, further credible energy-conservation commitments starting 2013 China has 

already committed itself to quantified targets on energy conservation and the use of 

clean energy. It needs to extend its level of ambition, further making credible 

quantified domestic commitments in these areas for the second commitment period. 

Such commitments would include but are not limited to continuing to set energysaving 

and pollutant control goals in the subsequent national five-year economic 

blueprints as challenging as the current 11th 5-year blueprint does, increasing 

investment in energy conservation and improving energy efficiency, significantly 

scaling up the use of renewable energies and other low-carbon technologies, in 

particular wind power and nuclear power, and doubling or even quadrupling the 

current unit capacity below which thousands of small, inefficient coal-fired plants 

need to be decommissioned (Zhang 2009c). 

Second, voluntary “no lose” emissions targets starting 2018 During this transition 

period, China could commit to adopting voluntary emission reduction targets. 

Emissions reductions achieved beyond these “no lose” targets would then be eligible 

for sale through carbon trading at the same world market price as those of developed 

countries whose emissions are capped, relative to the lower prices that China 

currently receives for carbon credits generated from clean development mechanism 

projects, meaning that China would suffer no net economic loss by adhering to the 

targets. 

Third, binding carbon intensity targets starting 2023, leading to emissions caps 

around 2030 While China is expected to adopt the carbon intensity target as a 

domestic commitment in 2011, China adopting binding carbon intensity targets in 

2023 as its international commitment would be a significant step towards 

committing to absolute emissions caps during the subsequent commitment period. 

At that juncture, having been granted three transition periods, China could then be 

expected to take on binding emissions caps, starting around 2030 and to aim for the 

global convergence of per capita emissions by 2050. 

4.2 A clear need within a climate regime to define comparable efforts towards climate 

mitigation and adaptation 

While indicating, well in advance, that it will take on absolute emissions caps around 

the year 2030, being targeted by such border carbon adjustment measures, China 

should make the best use of the forums provided under the UNFCCC and its KP to 

effectively deal with the proposed measures to its advantage (Zhang 2009b). 

However, China and other leading developing countries appear to be comfortable 

with WTO rules and institutions defending their interests in any dispute that may 

arise over unilateral trade measures. Top Chinese official in charge of climate issues 

and the Brazilian climate ambassador consider the WTO as the proper forum when 

developing countries are required to purchase emission allowances in the U.S. 

proposed cap-and-trade regime (Samuelsohn 2007). This is reinforced in the Political 

Declaration of the Leaders of Brazil, China, India, Mexico and South Africa (the socalled 

G5) in Sapporo, Japan, July 8, 2008 that “in the negotiations under the Bali 

Road Map, we urge the international community to focus on the core climate change


issues rather than inappropriate issues like competitiveness and trade protection 

measures which are being dealt with in other forums.” China may fear that the 

discussion on these no core issues will overshadow those core issues mandated 

under the Bali Action Plan (BAP). However, in my view, defining comparable 

efforts towards climate mitigation and adaptation within a climate regime is critical 

to addressing carbon tariffs of far-reaching implications. 

The BAP calls for “comparability of efforts” towards climate mitigation actions 

only among industrialized countries. However, lack of the clearly defined notion of 

what is comparable has led to diverse interpretations of the concept of comparability. 

Moreover, there is no equivalent language in the BAP to ensure that developing 

country actions, whatever might be agreed to at Copenhagen or later, are comparable 

to those of developed countries. So, some industrialized countries, if not all, have 

extended the scope of its application beyond industrialized countries themselves, and 

are considering the term “comparable” as the standard by which to assess the efforts 

made by all their trading partners in order to decide on whether to impose unilateral 

trade measures to address their own competitiveness concerns. Such lack of the 

common understanding will lead each country to define whether other countries 

have made comparative efforts to its own. This can hardly be objective, and in turn 

may lead one country to misuse unilateral trade measures against other trading 

partners to address its own competitiveness concerns. 

This is not hypothetical. Rather, it is very real as the Lieberman-Warner bill in the 

U.S. Senate and the Waxman-Markey bill in the U.S. House demonstrated. If such 

measures became law and were implemented, trading partners might choose to 

challenge U.S. before WTO. If a case like this is brought before a WTO panel, that 

panel would likely look to the UNFCCC for guidance on an appropriate standard for 

the comparability of climate efforts to assess whether the accused country has 

followed the international standard when determining comparability, as preceded in 

the Shrimp-Turtle dispute where the WTO Appellate Body considered the Rio 

Declaration on Environment and Development (WTO 1998). Otherwise, that WTO 

panel will have no choice but to fall back on the aforementioned Shrimp-Turtle 

jurisprudence (see Box 2), and would be influenced by the fear of the political fall 

out from overturning U.S. unilateral trade measures in its domestic climate 

legislation. 

If the U.S. measures were allowed to stand, not only China would suffer, but it 

would also undermine the UNFCCC’s legitimacy in setting and distributing climate 

commitments between its parties (Werksman and Houser 2008). Therefore, as 

strongly emphasized in my interview in the New York Times (Reuters 2009), rather 

than reliance solely on WTO, there is a clear need within a climate regime to define 

comparable efforts towards climate mitigation and adaptation to discipline the use of 

unilateral trade measures at the international level, taking into account differences in 

their national circumstances, such as current level of development, per capita GDP, 

current and historical emissions, emission intensity, and per capita emissions. If well 

defined, that will provide some reference to WTO panels in examining cases related 

to comparability issues. 

Indeed, defining the comparability of climate efforts can be to China’s advantage. 

China has repeatedly emphasized that it has taken many climate mitigation efforts. 

No country denies that, but at most China has received limited appreciation of its

220 Z. Zhang 

abatement efforts. Being praised for such efforts, China is urged to do “a lot more” 

(Doyle 2009). However, if the comparability of climate efforts is defined, then the 

many abatement efforts that China has been taking can be converted into the 

corresponding equivalent carbon allowance prices under the European Union and 

U.S. proposed emissions trading schemes. If such an equivalent is higher than 

prevailing U.S. allowance price, there is no rationale for the U.S. to impose carbon 

tariffs on Chinese products. If it is lower, then the level of carbon tariffs is only a 

differential between the equivalent and prevailing U.S. allowance price. 

Take export tariffs that China applied on its own as a case in point. During 2006– 

08, the Chinese government levied, on its own, export taxes on a variety of energy 

and resource intensive products to discourage exports of those products that rely 

heavily on energy and resources and to save scarce energy and resources (Zhang 

2008). Given the fact that China is a price setter in world aluminum, cement, iron 

and steel markets, its export policies have a significant effect on world prices and 

thus on EU competitiveness (Dröge et al. 2009). From the point of view of leveling 

the carbon cost playing field, such export taxes increase the price at which energyintensive 

products made in China, such as steel and aluminum, are traded in world 

markets. For the EU and U.S. producers, such export taxes imposed by their major 

trading partner on these products take out at least part, if not all, of the competitive 

pressure that is at the heart of the carbon leakage debates. Being converted into the 

implicit carbon costs, the average export tariffs of 10–15% applied in China on its 

own during 2006–08 are estimated to be equivalent to a EU allowance price of 30– 

43 €/tCO 2 for steel and of 18–26 €/tCO 2 for aluminium (Wang and Voituriez 2009). 

The estimated levels of CO 2 price embedded in the Chinese export taxes on steel and 

aluminium are very much in the same range as the average price of the EU 

allowances over the same period. Moreover, carbon tariffs impact disproportionally 

on energy-intensive manufacturing. Manufacturing contributes to 33% of China’s 

GDP relative to the corresponding 16% for India, and China’s GDP is 3.5–4.0 times 

that of India. This suggests that, in volume terms, energy-intensive manufacturing in 

China values 7–8 times that of India. Clearly, carbon tariffs have a greater impact on 

China than on India. This raises the issue of whether China should hold the same 

stance on this issue as India as it does now, although the two largest developing 

countries in international climate change negotiations have taken and should 

continue to hold to a common position on developed country obligations on 

ambitious emissions reductions, adequate technology transfer and financing. 

5 Concluding remarks 

With governments from around the world trying to hammer out a post-2012 climate 

change agreement, no one would disagree that a U.S. commitment to cut greenhouse 

gas emissions is essential to such a global pact. However, despite U.S. president 

Obama’s announcement to push for a commitment to cut U.S. greenhouse gas 

emissions by 17% by 2020, in reality it is questionable whether U.S. Congress will 

agree to specific emissions cuts, although they are not ambitious at all from the 

perspectives of both the EU and developing countries, without imposing carbon 

tariffs on Chinese products to the U.S. market, even given China’s own


announcement to voluntarily seek to reduce its carbon intensity by 40–45% over the 

same period. 10 

This dilemma is partly attributed to flaws in current international climate 

negotiations, which have been focused on commitments on the two targeted dates: 

2020 and 2050. However, with the commitment period only up to 2020, there is a 

very little room left for the U.S. and China, although for reasons very different from 

each other. Meanwhile, taking on something for 2050 seems too far away for 

politicians. In my view, if the commitment period is extended to 2030, it would 

really open the possibility for the U.S. and China to make the commitments that each 

wants from the other in the same form, although the scale of reductions would differ 

from each other. By 2030, the U.S. will be able to commit to much deeper emission 

cuts that China and developing countries have demanded, while, as argued in this 

paper, China would have approached the threshold to take on the absolute emission 

cap that the U.S. and other industrialized countries have long asked for. Being aware 

of his proposed provisional target in 2020 well below what is internationally 

expected from the U.S., president Obama announced a provisional target of a 42% 

reduction below 2005 levels in 2030 to demonstrate the U.S. continuing commitments 

and leadership to find a global solution to the threat of climate change. While 

the U.S. proposed level of emission reductions for 2030 is still not ambitious 

enough, president Obama inadvertently points out the right direction of international 

climate negotiations. They need to look at the targeted date of 2030. If international 

negotiations could lead to much deeper emission cuts for developed countries as 

well as the absolute emission caps for major developing countries in 2030, that 

would significantly reduce the legitimacy of the U.S. proposed carbon tariffs and, if 

implemented, their prospect for withstanding a challenge before WTO. 

However, if the international climate change negotiations continue on their 

current course, the inclusion of border carbon adjustment measures then seems 

essential to secure passage of any U.S. legislation capping its own greenhouse gas 

emissions. Moreover, the joint WTO-UNEP report indicates that border carbon 

adjustment measures might be allowed under the existing WTO rules, depending on 

how such measures are designed and the specific conditions for implementing them 

(WTO and UNEP 2009). Thus, on the U.S. side, in designing such trade measures, 

WTO rules need to be carefully scrutinised, and efforts need to be made early on to 

ensure that the proposed measures comply with them. After all, a conflict between 

the trade and climate regimes, if it breaks out, helps neither trade nor the global 

climate. The U.S. needs to explore, with its trading partners, cooperative sectoral 

approaches to advancing low-carbon technologies and/or concerted mitigation 

efforts in a given sector at the international level. Moreover, to increase the 

prospects for a successful WTO defence of the Waxman-Markey type of border 

adjustment provision, there should be: 1) a period of good faith efforts to reach 

agreements among the countries concerned before imposing such trade measures; 2) 

consideration of alternatives to trade provisions that could reasonably be expected to 

10 As long as China’s pledges are in the form of carbon intensity, the reliability of both emissions and 

GDP data matters. See Zhang (2010) for discussions on the reliability and revisions of China’s statistical 

data on energy and GDP, and their implications for meeting China’s existing energy-saving goal in 2010 

and its proposed carbon intensity target in 2020.

222 Z. Zhang 

fulfill the same function but are not inconsistent or less inconsistent with the relevant 

WTO provisions; and 3) trade provisions that can refer to the designated special 

international reserve allowance pool, but should allow importers to submit 

equivalent emission reduction units that are recognized by international treaties to 

cover the carbon contents of imported products. 

Being targeted by such border carbon adjustment measures, China needs to creditably 

indicate a serious commitment to address climate change issues to challenge the 

legitimacy of the U.S. imposing carbon tariffs. Being seen with greater capacity, 

capability and responsibility, China is facing great pressure both inside and outside 

international climate negotiations to exhibit greater ambition. As long as China does not 

signal well ahead that it will take on the emissions caps, it will always face the threats of 

trade measures. In response to these concerns and to put China in a positive position, the 

paper proposes that at current international climate talks China should negotiate a 

requirement that greenhouse gas emissions in industrialized countries be cut at least by 

80% by 2050 relative to their 1990 levels and that per capita emissions for all major 

countries by 2050 should be no more than the world’s average at that time. Moreover, it 

would be in China’s own best interest if, at a right time (e.g., at a time when the U.S. 

Senate is going to debate and ratify any global deal that would emerge from Copenhagen 

or later), China signals well ahead that it will take on binding absolute emission caps 

around the year 2030. 

However, it is hard to imagine how China could apply the brakes so sharply as to 

switch from rapid emissions growth to immediate emissions cuts, without passing 

through several intermediate phases. Taking the commitment period of five years as 

the Kyoto Protocol has adopted, the paper envisions that China needs the following 

three transitional periods of increasing climate obligations before taking on absolute 

emissions caps starting 2028 that will lead to the global convergence of per capita 

emissions by 2050: First, further credible energy-conservation commitments starting 

2013; second, voluntary “no lose” emission targets starting 2018; and third, binding 

carbon intensity targets as its international commitment starting 2023. Overall, this 

proposal is a balanced reflection of respecting China’s rights to grow and 

recognizing China’s growing responsibility for increasing greenhouse gas emissions 

as the standards of living increase over time. 

Meanwhile, China should make the best use of the forums provided under the 

UNFCCC and its KP to effectively deal with the proposed measures. I have argued 

that there is a clear need within a climate regime to define comparable efforts 

towards climate mitigation and adaptation to discipline the use of unilateral trade 

measures at the international level. As exemplified by export tariffs that China 

applied on its own during 2006–08, the paper shows that defining the comparability 

of climate efforts can be to China’s advantage. Furthermore, carbon tariffs impact 

disproportionally on energy-intensive manufacturing. Given the fact that, in volume 

terms, energy-intensive manufacturing in China values 7–8 times that of India, 

carbon tariffs clearly impact much more on China than on India. This raises the issue 

of whether China should hold the same stance on this issue as India as it does now. 

Finally, it should be emphasized that the Waxman-Markey type of border 

adjustment provision holds out more sticks than carrots to developing countries. If 

the U.S. and other industrialized countries really want to persuade developing 

countries to do more to combat climate change, they should first reflect on why


developing countries are unwilling to and cannot afford to go beyond the 

aforementioned third option in the first place. That will require industrialized 

countries to seriously consider developing countries’ legitimate demand that 

industrialized countries need to demonstrate that they have taken the lead in 

reducing their own greenhouse gas emissions, provide significant funding to support 

developing country’s climate change mitigation and adaptation efforts and to transfer 

low- or zero-carbon emission technologies at an affordable price to developing 

countries. Industrialized countries need to provide positive incentives to encourage 

developing countries to do more. Carrots should serve as the main means. Sticks can 

be incorporated, but only if they are credible and realistic and serve as a useful 

supplement to push developing countries to take actions or adopt policies and 

measures earlier than would otherwise have been the case. At a time when the world 

community is negotiating a post-2012 climate regime, unrealistic border carbon 

adjustment measures as exemplified in the Waxman-Markey bill are counterproductive 

to help to reach such an agreement on comparable climate actions in the negotiations. 

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DOI 10.1007/s10368-010-0170-z 


International economics of resource productivity – 

Relevance, measurement, empirical trends, innovation, 

resource policies 

Raimund Bleischwitz 



Abstract This paper undertakes a step to explaining the international economics of 

resource productivity. It argues that natural resources are back on the agenda for four 

reasons: the demand on world markets continues to increase, the environmental 

constraints to using resources are relevant throughout their whole life cycle, the 

access to critical metals could become a barrier to the low carbon economy, and 

uneven patterns of use will probably become a source of resource conflicts. Thus, 

the issue is also of relevance for the transition to a low carbon economy. ‚Material 

Flow Analysis’ is introduced as a tool to measure the use of natural resources within 

economies and internationally; such measurement methodology now is being 

harmonized under OECD auspices. For these reasons, the paper argues that resource 

productivity—that is the efficiency of using natural resources to produce goods and 

services in the economy—will become one of the key determinants of economic 

success and human well-being. An empirical chapter gives evidence on time series 

of resource productivity increases across a number of economies. Introducing the 

notion of ‘material flow innovation’, the paper also discusses the innovation 

dynamics and issues of competitiveness. However, as the paper concludes, market 

barriers make a case for effective resource policies that should provide incentives for 

knowledge generation and get the prices right. 


Besides the major concern with climate change, it is increasingly evident that the 

natural resource base is one of the major issues of international environmental 

A previous version has been presented at the ‚Shanghai Forum 2010’, Subforum on the “Emerging Energy & 

Low Carbon Economy: the Engine for Asia Economic Transformation”, May 29 – 31, 2010. I wish to thank the 

participants as well as Meghan O’Brian for useful comments. 

R. Bleischwitz (*) 

Wuppertal Institute Co-Director, Research Group “Material Flows and Resource Management”, 

P.O. Box 100 480, 42004 Wuppertal, Germany 

e-mail: raimund.bleischwitz@wupperinst.org

228 R. Bleischwitz 

economics and policy. This paper argues that resource productivity – that is the 

efficiency of using natural resources to produce goods and services in the economy – 

will be one of the key determinants of economic success and human well-being 

in the upcoming years and decades. Deviating from ongoing political struggle 

about burden sharing and abatement costs, our paper underlines that international 

economic policy shall promote resource productivity as a source of future 

competitive advantage as well as a pillar for the transition to a low carbon 

economy. 

Using materials more efficiently will allow for grasping more opportunities to 

save energy along the whole value chain, to save material purchasing costs and to 

enhance competitiveness. Thus it is clear that a key abatement strategy such as 

energy efficiency will be enhanced by attempts to use materials more efficiently. In a 

broader context, moreover, fossil fuels are but one natural resource that is used in 

societies worldwide. All potential substitutes such as biofuels and renewable 

energies depend upon natural resources such as land, steel and platinum. Providing 

these natural resources in the most sustainable manner will thus become a key 

strategy for climate change abatement as well as for green growth. How industry and 

economies take up these challenges will become a major issue for economic 

research. 

Our paper starts with an overview of why caring for natural resources is relevant 

from a sustainability point of view that addresses the whole lifecycle-wide use of 

resources and thus goes beyond just the supply side. The methodology of material 

flows is introduced in chapter three. Chapter four compares the resource productivity 

rates and levels of different economies worldwide. Chapter five analyses the 

relationship between innovation and competitiveness, and chapter six outlines pillars 

for a sustainable resource policy. 

2 Why caring about resources is relevant 

Caring about natural resources usually starts with addressing the scarcity of supply. 

Following findings of geological surveys, however, the Earth’s crust contains a 

resource base that is considered to be sufficient. Many basic materials such as iron 

ore, bauxite (used for aluminium production), magnesium, sand and gravel (essential 

for construction minerals) are almost abundantly available. From such a perspective, 

a general absolute scarcity can hardly be concluded. 

On the other hand there are strong reasons to analyse natural resources in a more 

comprehensive manner (MacLean et al. 2010), which in the end leads to 

fundamental concerns about their use due to: 

1. Increasing demand on world markets 

2. Environmental constraints 

3. Resource constraints to the low carbon economy 

4. Misallocation and uneven patterns of use. 

This paper will shortly discuss these issues before it moves on to analysing 

sustainable resource management. Our perspective follows the fundamental issues of 

substitutability, technological progress and long-term prosperity that have been the

International economics of resource productivity... 229 

core of resource economics 1 and develops an agenda that moves the issue closer to 

material flow analysis and international economic policy. 

2.1 Increasing demand on world markets 

Global extraction of natural resource is steadily increasing. Since 1980, global extraction 

of abiotic (fossil fuels, minerals) and biotic (agriculture, forestry, fishing) resources has 

augmented from 40 to 58 billion tonnes in 2005. The rapidly increasing demand for 

resources has led to an unprecedented boost in resource prices, especially during the five 

years prior to the breakout of the financial crisis in mid-2008. In nominal terms the 

general commodity prices increased by 300 per cent between 2002 and mid-2008 with 

prices of crude petroleum and minerals and metals escalating by 400 – 600 per cent. 

Even in real prices new historical peaks were reached in mid-2008 compared to 

development since 1960 (UNCTAD 2010: 8). The financial crisis has marked a short 

break to this trend, however extraction and prices have started to soar again. 

A recent study reveals that extraction in Asia has doubled over the last 25 years, 

and extraction growth has been much faster than the global average (Giljum et al. 

2010). 

Increasing demand cannot only be witnessed for fossil fuels and other energy 

sources but also for all other categories of natural resources (e.g. metals, construction 

minerals, biomass). 

The expected increase in global population and high economic growth rates will 

strongly raise extraction and the consumption of materials. Though not many global 

scenarios address the issue yet, those available anticipate further increases and a total 

resource extraction of around 80 billion tonnes in 2020 and over 100 billion tonnes 

in 2030, i.e. almost a doubling between 2000 and 2030. Agriculture and construction 

are expected to be the most important extractors until 2030 with an expected annual 

average growth of around 2,6 %. Basic assumptions behind this scenario were that 

resource consumption in industrialised countries would not decline significantly 

compared to today, and that the scarcity of resources would not come into effect 

(Lutz and Giljum 2009: 38) Fig. 1. 

This expected growth triggers exploration into new sources and efforts of 

turning ‚resources’ into ‚reserves’. Despite increasing expenditures however, the 

discoveries of major deposits and world-class discoveries have been decreasing 

since the mid 1990s (Ericsson 2009: 27). Structural reasons for the mismatch 

between increasing exploration costs and decreasing new discoveries are of 

geographical nature: new deposits are found in more remote and challenging 

regions, and ore grades are continuously declining. The bulk of the Earth’s crustis 

almost out of reach, be it because of environmental constraints, the energy intensity 

that would be necessary for extraction or because of other associated risks. 

International competition for access to resources (e.g., water, land, food) can result 

in tensions or open conflicts. Furthermore, prospecting for resources in new, far away 

and fragile environments, such as the Arctic, tropical forests or the ocean floor 

will also lead to conflicts over property rights. Ongoing efforts to replace some of 

1 

See e.g. the seminal paper written by Solow (1974) and the reflections in ‘Journal of Natural Resources 

Policy’ 1/2009.


Fig. 1 Global resource extraction 1980 – 2030 

non-renewable resources with renewables (e.g., crop-based biofuels) will add to 

pressures on productive land and, hence, increase conflict potential. 

In short, meeting the challenges of future demand for natural resources will 

certainly continue to be accompanied by increasing costs and is associated with risks 

for industries downstream. 

2.2 Environmental constraints 

The ecological impacts of increasing global resource use are becoming obvious. The 

limited abilities of ecosystems to absorb the different outputs of economic activities 

have been addressed e.g. by Stern (2008) and by the UN’s Millennium Ecosystem 

Assessment. This will put further pressure on producing agricultural commodities on 

arable land. 

The ability to extract and produce materials in a sustainable manner has become a 

concern. The opening of new mines pose opportunity costs for land use and often 

causes conflicts with agriculture over water issues. Many countries now have started 

desalinisation programmes for extraction purposes. Urban sprawl, the determining 

factor for construction minerals, often covers major fertile soils and reduces 

production capacities for biomass. The expansion of agriculture for the production 

of non-food biomass, for instance for biofuels, transforms forests and savannahs into 

cropland with negative consequences for biodiversity and ecosystems. In that 

perspective, the supply of energy and minerals needs to be put into a systems 

perspective of material flows and ecosystem services. 

The European Commission (Commission of the European Communities 2005) 

has suggested pursuing a ‘double decoupling’, firstly between economic growth and 

the use of natural resources and, secondly, between the use of natural resources and 

environmental pressure. Intuitively, this is an appealing concept. Such a distinction 

also follows the argument that has been put forward by Stern and Cleveland (2004): 

thermodynamic theory explains that a complete decoupling may not be feasible and 

that energy is required to produce and recycle materials. Thus, availability is 

essential for enabling economic growth. 

On the other hand, given the manifold environmental impacts, such analytical 

distinction between availability and growth may lead to narrow conclusions for


pursuing pollution-oriented policies for extractive industries only while the real 

challenge is to arrive at comprehensive concepts for resource-using industries. 

Evidence from research with combinations of Life Cycle Assessment and other 

tools such as Material Flow Analysis (see below) suggest that in fact variables 

of the two angles ‘materials’ and ‘environmental pressure’ are highly correlated 

when product groups, industries or economies are analysed (Bringezu and 

Bleischwitz 2009: 37f, 141). In a systems perspective one also ought to take into 

account that the Earth is a closed system for materials and land, whereas the sun 

constantly provides energy. To counterargue further against prioritising energy and 

pollution: producing useful forms of energy always requires materials. It thus 

makes sense to look at resources and their environmental impacts in a comprehensive 

manner. 

Environmental constraints arise across the whole life-cycle of using materials. 

Thus, while sustainable mining should certainly be an element for comprehensive 

strategies. It is essential to put this into the perspective of analysing the 

processes downstream across the material value chains of goods, i.e. transforming 

resources into materials, production, consumption, recycling activities and any final 

disposal. From the life-cycle perspective, all stages of the life-cycle chain offer 

opportunities to improve material efficiency, reduce waste generation and close the 

material loops of the economy. In that sense, concepts such as ‘material flow 

analysis’ and ‘industrial ecology’ reveal particular strengths. 

2.3 Resource constraints to the low carbon economy 

The interdependency between energy and materials can be highlighted for the case 

of resource constraints to the low carbon economy. Most renewable energies 2 

demand metals for their production, which are – at least partly – critical. Possible 

constraints comprise the following metals. Infrastructure for renewable energies 

requires non-renewable mineral resources for equipment and process installations. 

Telecommunication and other information technologies, which may contribute to 

reductions in global travel and transport, depend increasingly on microelectronic 

devices, which require speciality metals. Taking into account the ambitious climate 

change policies of many countries, a number of minerals may come under increasing 

constraints. 

Lithium-ion batteries, currently used in electronic devices are expected to play a 

growing role in future demand for electric cars. Though forecasts in that area are 

extremely sensitive to public policy programmes on clean cars, a Credit Suisse 

estimation of annual growth rates in the order of 10 % (McNulty and Khay 2009) 

seems conservative but robust. This will likely lead to increased extraction activities 

at a globally limited number of salt lakes, such as those in Bolivia, Argentina and 

Chile. 

Photovoltaic cells for solar arrays and LED energy-efficient lighting 3 both 

rely on gallium, a by-product of aluminium. Gallium for such green-tech 

2 Biomass might be an exception; however biomass gasification and other related technologies also 

demand metals for the production of useful energy. 

3 LED stands for light-emitting dioxide.


demand is estimated to exceed current total world production by a factor of six 

by the year 2030 (Angerer et al. 2009). Future market development for gallium 

might contribute to enhanced bauxite mining where countries such as Guinea, 

China, Russia and Kazakhstan are among the top ten reserve holders. 

Tantalum, used for capacitors in microelectronics such as mobile phones, pagers, 

PCs and automotive electronics, is mined mainly in Australia and Brazil. Due to a 

breakdown of production in Australia in early 2009, the Democratic Republic of 

Congo has become a major world supplier of tantalum. Militarisation of mining in 

this country is well documented (Global Witness 2008) and the country is already 

subject to UN investigations because of illegal trade revenues financing civil war 

activities. 

Precious metals like gold, silver and platinum are increasingly used in 

microelectronics. Platinum group metals (PGM) also play an important role as 

chemical catalysts, used for pollution control, such as in exhaust catalysts in cars, 

or in energy conversion technologies like fuel cells. Fuel cells are a very 

promising low carbon technology that can also be used in combination with 

hydrogen as a substitute for oil in the transportation sector. 4 PGM mining and 

refining is concentrated in only a few regions in the world. Platinum is mined in 

South Africa, and PGM are produced as a by-product of nickel and copper in 

Norilsk, Russia, and Ontario, Canada. The former is associated with extreme 

amounts of mining waste, the latter with considerable emissions of sulphur 

dioxide. The world’s platinum resources would not suffice to supply one third of 

the global car fleet in 2050 based on current fuel cell technologies (Saurat and 

Bringezu 2009). 

This shortlist is not exhaustive; further critical metals are e.g. copper and 

chrome, the latter being important for high-tech steel. In addition, phosphorus is 

a critical substance because it cannot be substituted at today’s knowledge and is 

essential for all nutritional processes on Earth (Cordell et al. 2009) – which is 

again a constraint on producing agricultural goods in the future and biomass 

strategies. 

As a result of this growing demand and concerns related to scarcity, a 

material leakage will have to be minimized and strategies of reuse will have to 

play a larger role. Any such strategies will have to include collection systems for 

consumer goods that are currently internationally traded and thus open loop 

systems. 

2.4 Misallocation and uneven patterns of use 

Because environmental constraints have only been incorporated into prices to a very 

limited extent, this non-internalization of negative externalities leads to distortions 

and misallocation. Globally, two thirds of the world population use on average 

between 5 and 6 tons of resources per capita; industrialised countries use twice or 

more the amount of resources per capita than developing and emerging economies. 

4 See e.g. the European Fuel Cell and Hydrogen Joint Undertaking at: http://ec.europa.eu/research/fch/ 

index_en.cfm and the World Hydrogen Conference at: http://www.whec2010.com


An average European uses about four times more resources per capita than 

inhabitants of Africa and three times more than in Asia. 

The level and patterns of resource use differ across countries. With an average of 

roughly 15 tons per capita according to the most commonly used indicator ‚Direct 

Material Input’, residents of the EU-27 use about half the resources compared to 

citizens of Australia, Canada and the United States, but about 25 % more than Japan 

and Switzerland. Within the EU-15 per capita consumption varies between 45t per 

capita (Finland) and 14t per capita (Italy) – a significant difference. Highly uneven 

patterns are also to be found in Asia. While a Bangladeshi consumes around 1,2 t of 

materials every year, resource use is at the order of 45 t per capita in small and rich 

oil-exporting countries such as Bahrain. China is currently estimated to consume 

materials in the order of 6,5 t per capita. In many medium and high-income countries 

such as South Korea, Israel, or Saudi Arabia, annual consumption is in the order of 

15 t / per capita, only slightly lower than the OECD average (Giljum et al. 2010: 3). 

It is interesting to note that some large economies experienced a modest decrease 

in the direct use of resources between 1992 and 2005. These include Germany, 

France, the United Kingdom, the Czech Republic and Sweden. It is also worth 

noting that Japan experienced the highest (22%) reduction in resource use per capita. 

Norway, Canada and Switzerland also reduced their figures from 1992 to 2005. 

3 Measurement of resources: Material Flow Analysis 

Material Flow Analysis (MFA) was created a few years ago to analyse the use of 

natural resources in societies (Fig. 2). It measures and analyses the flow of materials, 

energy and water across the system boundaries between the natural environment and 

the human sphere. It is associated with concepts such as ‘industrial ecology’ and 

Fig. 2 Economy-wide material balance scheme


the ‘socio-industrial metabolisms’. Integrating the stages of production, consumption 

and recycling, it goes beyond traditional resource economics and offers 

a comprehensive perspective for resource policy. Since Eurostat (2004) and 

OECD (2008) (Fig.2) have provided handbooks on the measurement of material 

flows, and do in fact promote the collection of data and use of MFA concepts, there 

are many opportunities for international economics and economic policy to 

integrate MFA into their models and empirical analysis. 

Direct Material Input (DMI) measures the input of materials that are used in the 

economy, that is, domestic extraction used (DEU) plus physical imports. Direct 

material consumption (DMC) accounts for all materials used by a country and is 

defined as all materials entering the national economy (used domestic extraction plus 

imports=DMI) minus the materials that are exported. In economic terms, DMC 

reflects consumption by the residents of a national economy. In contrast, the Total 

Material Requirements (TMR) and Total Material Consumption (TMC) also account 

for the indirect resource use that is associated with producing goods for a certain 

economy including their ‘ecological rucksacks’ that account for the unused earth 

masses moved during extraction and production processes. Both the European 

Commission and OECD aim at integrating the more inclusive indicator TMR/TMC 

in their accounting schemes and headline indicators. 

Sustainability research has revealed that measuring the material flows can also 

account for main environmental pressures, in particular for generic pressures 

stemming from the system turnover related to the input side of economies. 5 

4 General trends of resource productivity 

As a general trend, resource productivity 6 (GDP generated per ton of DMC) in Europe 

has improved – economies have been creating more value per ton of resources used. 

Material productivity in the EU-27 was highest in the United Kingdom, France, Malta, 

Italy, Belgium and Luxemburg, Germany and Sweden (in 2005). It was the lowest in 

countries such as Bulgaria, Romania, Estonia, Czech Republic and others. In total, the 

difference in performance across European economies mounts up to a factor of 17 

between top performers and low performers Fig. 3 (Schepelmann et al. 2009). 

The large economies in this group have also experienced a fairly high increase 

in material productivity. All the remaining European countries were either around 

(the Netherlands and Austria) or below the EU-27 average of 1,700 USD/ton DMC. 

To put this into an international perspective: material productivity in Switzerland 

was 3000 USD/ton, in Japan 2600 USD/ton, and in Norway 2000 USD/ton (in the 

year 2005). The United States, Canada, Australia and New Zealand had lower 

material productivity than the EU-27 average - although higher than the average for 

the EU-12 group. 

The growth in material productivity was fastest in the new EU member states, 

ranging from more than 50% for Latvia, Poland and the Czech Republic to 122% for 

5 Evidence from EU projects such as INDI-LINK, CALCAS, Sustainability A-Test, MATISSE, 

FORESCENE; see also Bringezu/Bleischwitz 2009, chapter 2. 

6 We use the term material productivity if the denominator is DMC or DMI and resource productivity for 

the more inclusive measurement approaches with TMR/TMC and for general purposes.


Fig. 3 Material productivity performance across European economies 

Estonia from 1992 to 2005. A growth of material productivity between 30% and 

50% occurred in the United Kingdom, Slovakia, Germany, France, Sweden, Ireland 

and Belgium with Luxemburg. 

It is interesting to note that the gap in material productivity between the EU’s new 

member states and old member states has not changed significantly since the early 

1990ies. In 2005 material productivity in the EU-12 was only 43% of the average for 

the EU-15, while in 1992 the same ratio was 41%. With the exception of Malta, 

material productivity in the new member states was well below EU-27 average. 

Despite continuous improvements, growth in the productivity of material 

resources in the EU has been significantly slower than growth in the productivity 

of labour and, to a lower degree, energy productivity. Over the period 1970-2005, 

productivity of labour increased by 140% in the EU-15, while productivity of 

materials grew by 90% and productivity of energy increased by 55%. In the EU-12, 

where a much shorter time series is available, productivity of materials increased by 

less than 30% between 1992 and 2005, whereas productivity of energy and labour 

grew hand in hand increasing by 65%. This surely reflects also a shift in using 

energy fuels as well as shifts in imports Fig. 4. 

Probably, a main driving force has been the relative pricing of these three inputs 

and the prevailing tax regimes, which make labour costs more expensive and has led 

to a focus on labour costs. Despite the high potential for improving material and 

energy productivity, most macro-economic restructuring and fiscal reform programmes 

in recent years tended to focus on reducing labour costs. Notwithstanding 

the pros and cons of this approach, improving material efficiency deserves more 

attention as a key to reducing costs and increasing competitiveness. 

During the period 1980-2005, material productivity in the EU as a bloc was 

markedly and consistently lower than in Switzerland and Japan (and to some degree 

behind Norway although the gap has been closing in recent years). There was also a 

notable gap between the EU 15 and the EU-12, with the material productivity in the 

latter group lagging behind Australia, Canada and the United States. However, it was 

a very wide spread within the EU itself, with an order of magnitude difference in 

resource efficiency between the United Kingdom (ahead of Japan) and Bulgaria and 

Romania (Fig. 5).


Fig. 4 Productivity of labour, materials, and energy across countries


Fig. 5 Changes in material productivity 1980 – 2004 across countries 

Driving forces for such uneven patterns of use and slow productivity dynamics 

certainly deserve more attention by research. Some general explanatory factors 

behind such development are the stages of development – in particular the intensity 

of use during early industrialisation stages – and income. However, major 

differences also occur across countries with similar levels of industrialization and 

income. Driving forces for resource productivity thus have to be analysed from a 

perspective that takes into account relevant socio-economic variables of economies 

and their innovation systems such as 

& Construction activities such as new dwellings completed, road construction, 

share of construction in GDP, 

& Structure of the energy system (a high share of coal and lignite correlates with 

higher TMR and DMC, efforts to increase energy efficiency correlate with 

resource productivity), 

& Imports and international trade: tentative evidence suggests a positive correlation 

between high imports and material intensity for industrialized countries. The 

reason probably lies in global production chains, where raw materials and 

intermediate goods are imported, transformed into finished products domestically 

and also traded globally, i.e. most industrialized countries utilize the international 

division of labour as net importers of natural resources. 7 By contrast, there is a 

positive correlation between high imports and material productivity for many less 

industrialized countries, which is probably due to the competitive pressure on 

inefficient and resource-intensive domestic industries in those countries. 

7 Test statistic for EU-15, 1980-2000: an increase in the import share by 1% would raise the DMC per 

capita by 0.225%. Research done by Soeren Steger, see Bleischwitz et al. 2009; see also: Dittrich 2009.


5 Resource productivity, competitiveness and innovation 

Our approach challenges traditional economic analysis that has determined 

natural resources as a factor of production and, hence, assumes that negative 

impacts on growth could occur if the supply of natural resources is constrained. 

In contrast we propose that regions – and in particular resource-poor regions – 

may benefit from increasing resource productivity, at least with regard to their 

import dependencies and costs to purchase commodities and probably also with 

regard to innovation. In line with our approach, research has demonstrated that 

resource-rich Developing Countries may experience their abundance of natural 

resources as a curse that hinders economic diversification, investments in human 

capital and democracy and, thus, lead to lower growth rates compared to other 

countries (Gylfason 2009). In line with the chapters above our approach enables 

research to looking at development across economies and industrial sectors in 

connection to social, institutional and ecological factors, in particular to emerging 

markets for eco-innovation. 

Our thesis is close to what is called the Porter hypothesis on first mover 

advantages for countries with an active environmental policy, but focuses 

stronger on market development and resources. In line with Porter, we also 

underline the assumption of eco-innovation effects to compensate for related 

investments. But global analysis of resources and material flows goes beyond 

Porter’s scope because 

& It explicitly addresses international distortions resulting from resource constraints 

and negative externalities namely in the fields of extraction and recycling (see 

above), and 

& It emphasizes the need for international policy approaches rather than assuming 

an international diffusion of national environmental policies. 

Since our approach covers all natural resources used in economies a guiding 

question for any green growth is whether and to what extent companies, industries 

and economies can enhance their prosperity through improvements in resource 

productivity (see also Weizsäcker et al. 2009). 

To test our thesis of a positive correlation between resource productivity and 

prosperity, we use data on the index of competitiveness as measured by the 

World Economic Forum and on the Domestic Material Consumption for 26 

countries. Our results suggest that there is a moderate positive relationship 

between the material productivity of economies (measured by GDP in purchasing 

power parity [PPP] US$ per kg DMC) and the score value of the growth 

competitiveness index (GCI) (Steger and Bleischwitz 2009: 184). The higher the 

level of material productivity the higher the level of competitiveness (R-squared of 

0,3). The usual test statistics was performed; both the t-statistics and the F-statistics 

are in the 95 % significance level, while heteroskedasticity was rejected using the 

Breusch-Pagan test and the White test. However Finland and Italy illustrate 

exceptional cases where a high value in one indicator is accompanied by a low 

value in the other indicator. 

Further evidence suggests that the correlation between competitiveness and 

resource productivity has not been increasing since 2001 on a broad scale, despite


high raw material prices and resulting efforts to use resources more efficiently. A 

strong correlation however has been found between the MEI-index of competitiveness 

(macro-economic institutions) and European energy productivity performance 

(R-squared of 0,76, Osnes 2010: 31). 

Thus, more research is needed; time series analysis with co-integrated panel data 

is probably a suitable methodology to deliver robust results on the causality between 

different drivers for competitiveness and resource productivity. In such research, 

critical variables are as follows: 

& Relevance of material costs for industry: research needs to clarify the total value 

of resources and track raw material costs along value chains: 

○ Importing costs for raw materials and semi-finished goods are a key variable 

for the competitiveness; for the EU, the value based share of the top-ten raw 

material imports in total imports grew between 1998 and 2004 from around 8% 

up to 13%. 8 

○ Data provided by the German Federal Statistical Office reveal that the costs of 

materials in Germany account for around 40 – 45 % of the gross production 

value of manufacturing companies (this includes purchased material inputs such 

as raw materials and intermediate goods). These data is based upon a 

questionnaire to industry managers and, hence, is relevant for industries but 

can hardly be added up to an aggregated figure for whole economies. 

○ Since most commodities are purchased on a US-Dollar basis, the exchange 

rate becomes quite relevant. Currently, the financial crisis has weakened the 

position of the Euro versus the US-$, which will lead to more extreme price 

increases for energy and metals in Europe compared to the US. 

○ The macroeconomic situation – characterized by increasing public debts – 

increases the vulnerability of economies towards higher commodity prices for 

raw materials. This may encourage resource savings because such strategy 

lowers risks of inflation caused by importing fuels and commodities, and it may 

also favour resource taxation. 

& It is also worth mentioning that the competitiveness indicators do not capture 

negative externalities. Countries investing in eco-innovation might earn the 

benefits at a later point in time, whereas countries with dumping practices and 

weak environmental standards can gain short-term benefits by lowering 

production costs at the expense of others. 

& The awareness among managers and companies to pursue material efficiency is 

still relatively low. Rennings and Rammer (2009) found that just 3% of German 

companies have reported significant undertakings to increase material efficiency 

in their analysis of the EU Community Innovation Survey (CIS). However sales 

per employee in those companies are approximately 15% higher than in average 

industries. These findings indicate a gap between current awareness and potential 

benefits that needs to be tested by more in-depth research at an international 

scale. 

8 

Based on Eurostat and 10 minerals, but no semi-final goods; the share actually is higher than the analysis 

of de Bruyn et al. (2009) suggests.


The vast majority of innovation can currently be characterized as process innovation, 

a strategy that offers affordable risks for companies compared to product innovation or 

system innovation. 9 Such process innovation becomes visible in material efficiency 

when companies accomplish strategies such as ‘zero losses’, ‘design to costs’, 

or ‘remanufacturing’. 

At an international scale however, material leakage occurs and an advanced 

process innovation of closing the loops in international value chains remains a 

challenge especially when end-of-life stages of consumer goods are considered. 

A 3R strategy for metals, which could be applied in the product groups of 

mobile phones and vehicles, requires further efforts and interlinkages between 

different types of innovation, including institutional change and political action in 

those countries where the used products are imported. According to Eurostat, the 

EU exports end-of-life vehicles predominantly to countries such Kazakhstan, 

Guinea, Russia, Belarus, Serbia, Benin and others. 

For that reason it will become important to complement producer responsibility 

with materials stewardship. In this regard and because only a limited number of 

industrial sectors require a significant share of the total resource requirements of the 

economy, 10 a sectoral approach to innovation (Malerba 2007) is useful to pursue. In 

such a perspective, new business models for base metal industries might emerge 

(Petri 2007), which could position the industry at the heart of material value chains. 

This is a horizontal task, which clearly transcends vertical production patterns, for 

example, along the automotive chain. Within networks and partnerships of 

integrated material flows management, the base metal industry can demonstrate 

stewardship and leadership. The challenge is to overcome the business model of a 

primary production company delivering basic materials and develop competences 

towards a fully integrated material flow company network, with high knowledge 

intensity, customer orientation, worldwide logistics, high-level recycling and a 

long time horizon. Such base metal companies will manage products, flows and 

stocks. 

In total, resource productivity underlines a new category of innovation that can be 

characterized as “material flow innovation”. It captures innovation across the 

material value chains of products and processes that lower the material intensity of 

use while increasing service intensity and well-being. It aims to move societies from 

the extract, consume, and dispose system of today's resource use towards a more 

circular system of material use and re-use with less resource use overall. While the 

established categories of process, product and system innovation (and organisational 

and advertising innovation, see e.g. the OECD Oslo Manual on Innovation) have 

their merits, the claim can be made that given the pervasive use of resources across 

all stages of production and consumption a new category will have to be established 

to capture innovation activities which include 

– Developing new materials with better environmental performance; 

– Substituting environmentally intensive materials with new materials, functionally 

new products and functionally new services leading to lower demand; 

9 

See also the paper written by Tomoo Machiba. 

10 

In Germany, ten sectors induce more than 75% of the TMR; see Acosta et al. 2007.


– Establishing life-cycle wide processes of material efficiency e.g. by sustainable 

mining, more efficient production and application of materials and strategies 

such as 

& Enhancing re-use and recycling 

& Recapturing precious materials from previously open loop systems (e.g. 

critical metals, phosphorus) 

& Functionally integrating modules and materials in complex goods (e.g. solar 

cells integrated in roofs) 

& Increasing the lifetime and durability and offer related services 

– Transforming infrastructures towards a steady-state stocks society e.g. via improved 

maintenance systems for roads and buildings as well as developing new resourcelight 

buildings and transportation systems and other network goods (such as waste 

water systems) and, in the long run, establishing a solarised technosphere for 

dwellings and other systems of provision (Bringezu 2009). 

Such a perspective on innovation and green growth is also consistent with lead 

markets worldwide. In distinction to prevailing climate change diplomacy, where it is 

difficult to engage the emerging economies, our perspective sheds light on attractive 

lead markets in emerging economies because they can build upon advantages from their 

natural endowments and allow for the establishment of new development pathways. 11 

6 Resource policies: strategic pillars and incentives 

Innovation and lead market perspectives are however faced with barriers and market 

failures (Bleischwitz et al. 2009b: 228ff); policies will be needed to manage the 

ensuing transition processes. Corresponding policy objectives are unlikely to be 

delivered by one single instrument alone. One of the key conclusions of various 

strands of research is that a well-designed mix of institutional change and policy 

instruments is better capable of governing transition strategies than single instruments 

(Smith et al. 2005; Bleischwitz 2007) Fig. 6. 12 

Better information is crucial for sustainable resource management, especially for 

improving material efficiency at the business level. The issue is not the supply of 

information alone, but the dissemination and appropriate application of such 

information in daily business routines. 

Public programmes to promote material efficiency and resource productivity can 

help to improve the information base, especially in SMEs, and facilitate market 

entry. The German Material Efficiency Agency, the regional eco-efficiency agency 

of North Rhine–Westphalia and the UK Resource Efficiency Network have 

demonstrated good success in approaching companies and disseminating knowhow 

on promoting material efficiency. 

From a mid-term perspective, the establishment of an international database 

and data centre on the resource intensity of products and services is needed 

11 See also the contribution Rainer Waltz in this issue (Aghion et al. 2009; OECD 2009). 

12 See also the contributions by Rene Kemp and Paul Ekins in this issue.


Fig. 6 Resource policy 

(Bleischwitz et al. 2009b: 241ff). The main objective of an international database is 

to provide users with validated, internationally harmonised and periodically 

updated data on key resources, the resource intensity and related key indicators 

of raw materials, semi-manufactured goods, finished products and services. 

Following the slogan ‘no data no market’, such data facilitates a sustainable 

management of material flows in value chains and economies and a dematerialisation 

of currently unsustainable production and consumption patterns. Over time, 

such an international database should also offer data on indirect resource flows as 

well as data on material cost structures of industries. 

A regulatory perspective should be emphasised. Clear long-term signals, credible 

commitments and strong incentives need to be given from policies. Economic 

incentives can play a key role by triggering markets towards eco-innovation. Taxes 

have the advantage of being implementable by individual governments without 

international agreements. All taxes are controversial, but those on recognised ‘bads’ 

such as tobacco, alcohol or carbon emissions may be less so than others and allow 

the balance of taxes to be adjusted away from others, such as on income and labour. 

Towards the model of a ‘Material Input Tax’, which offers theoretically 

convincing but less operational advantages, a real world proposal is on taxing 

construction minerals. Following a tax on aggregates that has been successfully 

implemented in the UK (EEA 2008), a construction tax could address basic materials 

such as sand, gravel, crushed rocks and start from a level that is approximately 30% 

above market price, with a stepwise increase of 3 – 5% p.a. The objective is to 

facilitate recycling and innovation – including system innovations such as resourcelight 

construction and functionally integrated building envelopes. Besides the 

intended steering effect, parts of the revenues could also be used to finance 

innovation programmes in such direction. 

A combination of information-based, knowledge generating incentives supported by 

a pricing policy can be seen as a strong momentum for increasing resource productivity. 

Other instruments such as standard setting may add to this. It will be important to 

address the international level. In this case, a 3R policy will have to address open trade 

for critical metals and recycling as well as to facilitate action by establishing an 

international contract (‘covenant’) on closing material loops for resource-intensive 

consumer goods. Such a covenant might include the main countries of production and 

final consumption of vehicles and electronic devices, and establish principles of 

materials stewardship, certification and responsibility. While providing investment 

opportunities and stability, it may also offer incentives for Developing Countries to join.


Furthermore, an international agreement on sustainable resource management is deemed 

necessary in the long run (Bleischwitz et al. 2009b). 

7 Conclusions 

Our paper emphasizes the transformation to a green economy that comes along with 

resource constraints and increasing resource productivity. It puts the need to limit 

and lower the emissions of greenhouse gases in the wider context of managing 

ecosystems and natural resources in a sustainable manner while acknowledging the 

prospects for eco-innovation and green growth. The claim is made that this offers a 

comprehensive view on possible resource constraints as well as on tangible business 

opportunities, in particular if policies act as a ‘visible hand’. This means that policies 

should provide a long-term orientation, essential information and sound economic 

incentives, complemented by international cooperation. Regarding the latter, our 

paper proposes an international covenant to establish material stewardship for metals 

and an international agreement on sustainable resource management. 

However more research ought to be done to understand and explore the 

international economics of such transition strategies and its interdisciplinary 

dimensions. Research needs to conduct time series analysis to establish causality 

on drivers for resource use and competitiveness as well as to explore the relevance of 

lifecycle material costs across different industries and economies. In that regard, 

international economics and economic policy are entering a fascinating field. 

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DOI 10.1007/s10368-010-0164-x 


Competences for green development and leapfrogging 

in newly industrializing countries 

Rainer Walz 

Published online: 30 May 2010 


Abstract Competences for green development and leapfrogging in Newly Industrializing 

Countries are becoming increasingly urgent from a global perspective. The 

integration of these innovations into the development process in the rapidly growing 

economies requires knowledge build-up and technology cooperation. The prospect 

of exporting sustainability technologies can add an incentive for them to move 

towards sustainability technologies. These issues also affect innovations to increase 

material efficiency, which are receiving increasing interest among sustainability 

innovations. The competences for green development are analyzed with an 

innovation indicator approach. The general innovation capabilities are evaluated 

using R&D indicators and survey results about general innovation capabilities. 

Technological competences in the sustainability fields are a key indicator for the 

absorptive capacity of sustainability technologies and for the ability to export them. 

International patents and publications, and successes in foreign trade indicate to what 

extent a country is already able to participate in global technology markets. The 

resulting pattern shows various strengths and weaknesses of the analyzed countries. 

In general, the knowledge build up in material efficiency strategies is above-average 

in the Newly Industrializing Countries. There is a strong need for strategic positioning 

of the countries and for coordination of the various policy fields involved. 

Keywords Sustainability technologies . Absorptive capacities . Patents . Trade 

patterns . Material efficiency . Newly industrializing countries 

JEL Classifications F14 . O14 . O3 

Acknowledgements The author is very grateful for the suggestions provided by two anonymous referees. He 

also wants to thank his colleagues Rainer Frietsch, Nicki Helfrich and Frank Marscheider-Weidemann from 

Fraunhofer ISI for their help in data search. The financial contribution of the German BMBF is acknowledged. 

R. Walz (*) 

Fraunhofer Institute for Systems and Innovation Research, Breslauer Strasse 48, 76139 Karlsruhe, 

Germany 

e-mail: rainer.walz@isi.fraunhofer.de

246 R. Walz 


Competences for green development and leapfrogging in Newly Industrializing 

Countries (NICs) are becoming increasingly urgent from a global perspective. This 

also holds for innovations to increase material efficiency, which are receiving 

increasing interest among sustainability innovations. The integration of these 

innovations into the development process in the rapidly growing economies requires 

knowledge build-up and technology cooperation. The prospect of exporting 

sustainability technologies can add an incentive for Newly Industrializing Countries 

to move towards sustainability technologies. 

The first part of the paper deals with conceptual issues. First, the importance of 

innovation and technology cooperation are discussed within the traditional view of 

environmental economics on global environmental challenges. Prerequisites for 

successful technology cooperation and export success in international trade are 

presented. Secondly, the empirical research concept to measure capabilities for green 

development is explained. 

The remainder of the paper analyses selected NICs. The empirical results include 

the general framework condition for sustainability innovations. The technological 

capabilities in sustainability technologies are analyzed. They comprise 6 fields of 

sustainability technologies: (1) material efficiency, including renewable resources, 

ecodesign of products and recycling, (2) environmental friendly energy supply 

technologies, including renewable energy, cogeneration and CO2 neutral fossil fuels, 

(3) energy efficiency, both in buildings and in industry, (4) transport technologies, 

(5) water technologies, and (6) waste management technologies. These technological 

fields are analyzed with innovation indicators such as publications, patents and trade. 

In an additional section, disaggregated results are presented for the case of material 

efficiency. Based on these results, first conclusions for the role of sustainability 

innovations for the economic development process in NICs are drawn. Finally, the 

limitations of such an indicator based overview are explored. 

2 Conceptual issues 

2.1 Prerequisites for leapfrogging 

There is general consensus that environmental sustainability requires an integration 

of environmental friendly technologies in the economic catching up process of 

Newly Industrializing Countries (NICs). Since the seminal paper of Grossmann and 

Krueger (1995), this challenge is discussed within the concept of the Environmental 

Kuznets Curve (EKC). According to the EKC-hypothesis, environmental pressure 

grows faster than income in a first stage of economic development. This is followed 

by a second stage, in which environmental pressure still increases, but slower than 

GDP. After a particular income level has been reached, environmental pressure 

declines despite continued income growth. Graphically, this hypothesis leads to an 

inverted U-curve similar to the relationship Kuznets suggested for income inequality 

and economic per capita income (Fig. 1).

Competences for green development and leapfrogging 247 

Environmental 

pressure 

emissions industrialized 

countries 

emissions catching up 

countries 

GDP/capita 

Within the global environmental debate, it is argued that NICs do not necessarily 

have to follow the emissions path of the industrialized countries. An alternative 

development path can be labeled “tunneling through the EKC” or “leapfrogging” 

(Munasinghe 1999; Perkins 2003; Gallagher 2006). It is argued that countries 

catching up economically can realize the peak of their EKC at a much lower level of 

environmental pressure than the developed countries. Developing countries could 

draw on the experience of industrialized countries allowing them to leapfrog to the 

latest sustainability technology. This leads to a “strategic tunnel” through the EKC. 

Here, environmental economists put faith into quick technological development and 

knowledge transfer as a key for reconciling environmental sustainability with 

economic development in NICs. 

There are several critical aspects to this concept (see Ekins 1997 or Dinda 2004 

for excellent overviews). First of all, the existence of an EKC is far from certain. 

Even if the data indicates that for some pollutants, e.g. SO2, an EKC exists, it is far 

from certain that this holds for global problems such as CO2-emissions or material 

use. Furthermore, even if such a development can be seen in the developed world, it 

might just reflect a displacement effect of dirty industries to other less developed 

countries. In addition, even if environmental pressure is declining, it is far from 

certain that this results in a sustainable path due to the characteristic of many 

environmental problems as a stock problem. Finally, there is clear evidence that such 

a development does not occur naturally, but requires active policies and regulations 

and an appropriate institutional setting (Dutt 2009). 

With regard to transferring the EKC-concept to NICs, two additional critical 

questions to this concept have to be addressed: 

& First, is the interest of the NICs strong enough to push in that direction? 

& Second, are the countries—given their stage of development—able to absorb the 

latest sustainability technologies and thus to leapfrog? 

tunnel 

Fig. 1 Concept of tunneling through the Environmental Kuznets Curve 

technology and 

knowledge transfer 

between countries

248 R. Walz 

Based on the pollution haven hypothesis and the environmental dumping 

mechanism it can be argued that there might be a disincentive for strong 

environmental policies in the NICs in order to attract pollution intensive industries 

(Copeland and Taylor 2004). However, there are also different incentives for NICs to 

push for sustainability technologies: 

& Firstly, environmental problems and related health issues are becoming major 

issues within NICs, and many of the sustainability technologies would help to 

improve this domestic environmental pressure. 

& Secondly, many analyzed sustainability technologies improve the infrastructure, 

e.g. in the energy, water or transportation sector, or address the growing demand 

for raw materials. Thus, they are also part of an economic modernization 

strategy. 

& Thirdly, moving towards environmental sustainability will create huge international 

markets for sustainability technologies. It is estimated that the sustainability 

technologies will be a major market in the future, with average annual growth 

rates for technology demand in the fields of energy supply, energy efficiency, 

transport, water technologies and material efficiency in the order of 5 to 8% per 

year. These high growth rates will lead to an annual demand for technologies in 

these five fields above 2,000 billion Euro in 2020 (Roland Berger 2007; Ecorys 

et al. 2009). Thus, another incentive is that NICs engage in the development and 

production of these technologies and compete with the countries of the North for 

lead roles in supplying the world market with sustainability technologies. 

The debate on technological catch-up and leapfrogging can be traced back some 

time. It gained prominence among the scholars developing an evolutionary theory of 

trade (Soete 1985; Perez and Soete 1988; Dosi et al. 1990). Technological 

cooperation focuses on the knowledge base required by the technologies and on 

enabling competences in the countries. Since the end of the 1980’s, the concepts of 

Social or Absorptive Capacity (Abramovitz 1986; Cohen and Levinthal 1990) and 

technological capabilities (Lall 1992; Bell and Pavitt 1993) are widely known. The 

results of the catching-up research in the last years (e.g. Fagerberg and Godinho 

2005; Nelson 2007; Malerba and Nelson 2008) and of empirical studies on 

developing capabilities especially in the context of the Asian countries (Lall 1998; 

Lee and Lim 2001; Lee 2005; Lee and Lim 2005; Rasiah 2008) have underlined the 

importance of absorptive capacity and competence building. Furthermore, there is 

increasing debate about the changing nature of technology transfer and cooperation 

with regard to learning and knowledge acquisition. One aspect to consider is the 

tendency that the build up of technological and production capabilities are becoming 

increasingly separated (Bell and Pavitt 1993). Another aspect relates to the effect of 

globalization on the mechanisms for knowledge dissemination. Archibugi and 

Pietrobelli (2003) stress the point that importing technology has per se little impact 

on learning, and call for policies to upgrade cooperation strategies towards 

technological partnering. Nelson (2007) highlights the changing legal environment 

and the fact that the scientific and technical communities have been moving much 

closer together. All these factors lead to the conclusion that indigenous competences 

in sustainability related science and technology fields are increasingly a prerequisite 

for the successful absorption of sustainability technologies in NICs.


The economic rationale for pushing for sustainability innovations in order to 

realize export potential is linked to the concepts of first mover advantages and lead 

markets. A first-mover advantage requires that competition is driven not so much by 

cost differentials and the resulting attractiveness of international production location 

alone, but also by quality aspects. Empirical results indicate that under these 

conditions, unit labor costs play a lower role in determining exports (Amable and 

Verspagen 1995; Wakelin 1998). Above all for technology-intensive goods, which 

include many environmental innovations, high market shares depend on the 

innovation ability of a national economy and its early market presence. Thus, the 

argument can be made that if countries push for increasing material efficiency, they 

tend to specialize early in the supply of the necessary technologies. If there is a 

subsequent expansion of the international demand for these technologies, these 

countries are then in a position to dominate international competition due to their 

early specialization in this field. 

The following factors have to be taken into account when assessing the potential 

of countries to become a lead market in a specific technology (Walz 2006): 

& Lead market capability: it is not possible to reach a lead-market position for every 

good or technology. One prerequisite is that competition is driven not by cost 

differentials alone, but also by quality aspects. This prerequisite is fulfilled 

especially for knowledge-intensive goods. Other important factors are intensive 

user-producer relationships and a high level of implicit knowledge (Archibugi and 

Michie 1998, Archibugi and Pietrobelli 2003; Dosi et al. 1990, Fagerberg 1995). 

& The importance of the demand side is an important part of the analysis of von 

Hippel (1986), Porter and van der Linde (1995) or Dosi et al. (1990). Beise 

(2004) classifies the demand factors in 5 categories, distinguishing demand and 

price advantage, market structure, and transfer and export advantage. 

& A lead market situation must also be supported by regulation which at the same 

time is innovation-friendly and sets the example for other countries to follow the 

same regulatory path (Blind et al. 2004; Beise and Rennings 2005; Walz 2006, 

2007). This relates to different aspects: First, for environmentally friendly 

technologies, the demand depends very much on the extent by which regulation 

leads to a correction of the market failures which consists in the externality of the 

environmental problems (Rennings 2000). Without such regulation, the demand 

will be much lower, and the various demand effects are less likely to be strong. 

Second, the national regulation should not lead to an idiosyncratic innovation, in 

other words an innovation that can be only applied under the very specific 

national regulatory regime. In contrast, the regulation should be open to diverse 

technical solutions, which increase the chance that they fit into the preferences of 

importing countries. Third, the national regulation should set the standard for the 

regulatory regime, which other countries are likely to adopt. Examples for this 

are product standards or testing procedures, which have to be fulfilled before a 

technology becomes classified as environmentally benign. If the procedure from 

the lead country is adopted in other countries, the national suppliers from the 

lead country have additional advantages on the world market, because they have 

adapted their technologies early on to pass the requirements of such a regulatory 

regime, and have developed administrative capabilities how to deal with all the

250 R. Walz 

procedures. However, even though there has been some clarification of the 

mechanisms which make regulation an important parameter for a lead market, 

there is a lot of additional research necessary to develop a clear methodology on 

how to operationalize the empirical evaluation of an existing regulatory regime 

with regard to its innovation friendliness. 

& It has become increasingly accepted that international trade performance depends 

on technological capabilities (for an overview see Dosi et al. 1990; Fagerberg 

1994). Despite all the problems and caveats associated with measuring 

technological capabilities, indicators on R&D expenditures and patent indicators 

such as share of patents or the relative patent advantage are among the most 

widely used indicators. The empirical importance of these indicators for trade 

patterns is also supported by recent empirical research (e.g. Sanyal 2004, 

Andersson and Ejermo 2008 and Madsen 2008). 

& It is widely held that innovation and economic success also depend on how a 

specific technology is embedded into other relevant industry cluster. Learning 

effects, expectations of the users of the technology and knowledge spillovers are 

more easily realized if the flow of this (tacit) knowledge is facilitated by 

proximity and a common knowledge of language and institutions (Archibugi and 

Pietrobelli 2003; Dosi et al. 1990; Fagerberg 1994). 

Altogether, it is more and more acknowledged that the absorption of developed 

technologies and the development of abilities to further advance these technologies 

and their international marketing are closely interwoven (Nelson 2007). For both 

strategies—transfer of knowledge from traditional industrialized countries and 

establishing export oriented market success—it is necessary to develop substantial 

capabilities for sustainability innovations within the NICs. 

2.2 Research concept 

This paper addresses the competences for sustainability innovations in green 

technology markets. It concentrates on an indicator framework to develop a top 

down macro overview on the technological capabilities in sustainability technologies 

in Newly Industrializing Countries (NICs). The following technological fields were 

included under the heading of sustainability innovations: (1) material efficiency, 

including renewable resources, ecodesign of products and recycling, (2) environmental 

friendly energy supply technologies, including renewable energy, energy 

storage, cogeneration and CO2 neutral fossil fuels, but excluding nuclear energy, (3) 

energy efficiency, both in buildings and in industry, (4) transport technologies, (5) 

water technologies, and (6) waste management technologies. In addition to an 

analysis for the aggregate of sustainability innovations, a more disaggregated 

analysis for material efficiency is performed. 

Measuring technological capabilities can draw on the experience with innovation 

indicators made over the last two decades (see Grupp 1998; Smith 2004; Freeman 

and Soete 2009). In the remaining of the paper, empirical results for the following 

aspects are presented: 

1. Sustainability innovations require good framework conditions for innovations in 

general. These general innovation framework conditions in NICs are analyzed


by using general science and innovation indicators on the one hand, and survey 

data from WEF (2006) on the other. However, the results depend on the 

analytical framework of these approaches, and must be cautiously interpreted. 

2. Publication indicators are an intermediate output indicator for measuring the 

capability related to scientific output. Publications covered by the Science 

Citation Index (SCI) in the field of environmental engineering are used in order 

to measure the capabilities of NICs with regard to sustainability innovations. It 

has to be acknowledged that—compared to the natural and social sciences— 

publications are seen as a less reliable indicator for measuring the scientific 

output of engineers. Nevertheless, they provide a good data source for changes 

in the development over time. 

3. Patents are among the most used indicators in innovation research. They belong 

also to the intermediate output indicators of knowledge build up, but are more 

directly related to technological capabilities than scientific literature. The analysis 

in this paper primarily draws on patent applications at the World Intellectual 

Property Organization and thus transnational patents (for the concept see Walz et 

al. 2008 and Frietsch and Schmoch 2010). In this way, a method of mapping 

international patents is employed which does not target individual markets such 

as Europe but is much more transnational in character. The NICs' patents 

identified in this way reveal those segments in which patent applicants are already 

taking a broader international perspective. In this paper, the years 2002–2006 

were chosen as the period of study so that a statistically more reliable population 

is achieved in which chance fluctuations in individual years are evened out. 

4. International trade figures indicate the degree to which a country is able to compete 

internationally. As argued in Section 2.1, the competitiveness with regard to 

technology intensive goods is influenced by the technological capabilities of the 

countries. Sustainability innovations mostly fall into the category of sectors which 

are classified as medium-high-technologies industries. Thus, trade figures for 

these technologies also indicate the degree of technological capabilities. The 

database UN-COMTRADE is referred to for trade figures. It is not limited to trade 

with OECD countries, but also covers South-South trade relations. In addition, the 

classification of the technologies is using the Harmonized System (HS) 2002. This 

foreign trade classification allows more disaggregation and therefore a better 

targeting of the sustainability technologies compared with the older classifications 

common in international comparisons (Standard International Trade Classification 

SITC). The latest year available for the analysis was 2006. 

For patents, literature publications, and world trade, the share of the NICs at the 

world total was calculated (literature share, patent share, world export share). 

Furthermore, specialization indicators (relative patent advantage (RPA); relative 

literature advantage (RLA), relative export activity (RXA) and revealed comparative 

advantage (RCA) were calculated, in order to analyze whether or not the NICs 

specialize on the sustainability technologies: 

For every country i and every technology field j the Relative Patent Activity (RPA) 

" , , ! # 

P P P 

is calculated according to: RPAij ¼ 100» tanh ln pij pij pij pij 

The RLA and the RXA are calculated in a similar way as the RPA, by substituting 

patents (p) by literature publications (l) and exports (x) respectively. 

i 

j 

ij

252 R. Walz 

In addition to exports, which are the basis of the RXA, the RCA takes also the 

imports m into account and is calculated according to: 

" , , ! # 

X X 

RCAij ¼ 100» tanh ln xij mij 

All specialization indicators are normalized between +100 and–100 (see Grupp, 

1998). Positive values indicate an above average specialization on the analyzed 

technologies, a negative value shows that the country is more specializing on other 

technologies. 

Sustainability technologies are neither a patent class nor a classification in the 

HS-2002 classification of the trade data from the UN-COMTRAD databank which 

can be easily detected. Thus, for each technology, it was necessary to identify the 

key technological concepts and segments. They were transformed into specific 

search concepts for the patent data and the trade data. This required an enormous 

amount of work and substantial engineering skills. Furthermore, there is a dual use 

problem of the identified segments. The data only indicates that there is a 

technological capability which could be used for sustainability—not necessarily 

that these technologies are already implemented in a way that the environmental 

burden is reduced. Thus, in order to reflect that ambiguity, the term sustainability 

technology, which is used in the remainder of the text, has to be interpreted as 

sustainability relevant technology. 

3 General framework conditions for innovations 

The quantitative data on innovation capacity give a first indication of the general 

conditions for innovation. Figure 2 indicates that the national R&D intensity or the 

share of the business expenditures on R&D of industry (BERD) is rather different for 

the NICs covered. It reaches from very small numbers, e.g. for Indonesia ID) or the 

Philippines (PH), to values typical for OECD countries, e.g. for Singapore (SG), 

Taiwan (TW), or South Korea (KR). Thus, there is considerable heterogeneity 

among the NICs. Among the NICs, particular interest is often put towards the so 

called BICS countries, that is Brazil (BR), India (IN), China (CN) and South Africa 

(ZA). The number for the BICS countries is around average for the analyzed NICs. 

However, China has increased the R&D expenditures lately, and runs ahead within 

BICS. Given the size of China, the volume of national R&D expenditure and BERD 

or the number of scientists is much higher in China than in the other BICS countries. 

Looking at specific numbers with regard to inhabitants, India clearly lacks behind 

the other BICS countries. 

A second approach for the analysis of the general framework conditions uses the 

survey data of the World Economic Forum (WEF 2006), which is based on expert 

opinions. In order to obtain an innovation system index, the indicators are classified 

into the categories human resources, technological absorption, innovation capacity 

and innovation friendliness of regulation. For this index, 56 countries are taken into 

account, comprising OECD countries as well as NICs and a few developing 

countries for which the indivcator values are available. The indicator values are 

j 

xij 

j 

mij


R&D expenditures as percentage of GDP 

3,00 

2,50 

2,00 

1,50 

1,00 

0,50 

0,00 

Total R&D expenditures (2005)* 

BERD (2005)* 

id ph th ve mx ar my tr cl za br in cn sg tw kr 

Fig. 2 R&D indicators for the analyzed NICs. Source: Compilation of ISI, based on OECD and 

UNESCO data 

aggregated using principal component analysis (see Peuckert 2008). The index 

values are normalized in a way that a value of zero indicates that the general 

innovation capabilities of a country are estimated to be at the average of all 56 

countries included in the survey. According to these results, Singapore, Taiwan, 

South Korea, and Malaysia, but also India and Chile are classified as those countries 

with the best framework conditions among the analyzed NICs (Fig. 3). 

Comparing the results from both approaches, some differences become apparent, 

e.g. with regard to the results for Malaysia versus China. Thus, a careful 

interpretation is necessary which takes into account results from both methods. 

Fig. 3 Innovation system index for the general innovation conditions in selected Newly Industrializing 

Countries. Source: calculations from Peukert 2008, based on survey data of WEF (2006)

254 R. Walz 

4 Technological capability in the area of sustainability relevant technologies 

4.1 Analysis of publications 

The development of publications can be used as an indicator for the change in the 

importance of scientific fields over time. Clearly the topic of environmental 

engineering has received increasing importance. For both, the world and selected 

Newly Industrializing Countries (Brazil, India, China, South Africa, Korea, Taiwan, 

and the other NICs in South East Asia, the growth of environmental engineering 

publications has outpaced the growth of all SCI publications over the last 13 years 

(Fig. 4). Furthermore, the growth in publications has been much stronger in the NICs 

than the rest of the world. Thus, it can be argued that the topic of environmental 

engineering is increasingly taking a hold in the scientific community of NICs. 

The development within the NICs has not been homogenous, however. This can 

be seen from a detailed look on the development within Brazil, India, China, and 

South Africa (the BICS countries). The growth in the overall importance of 

environmental engineering publications has been accompanied by an increasing 

share from the BICS countries. In 2007, the BICS accounted for 12% of the world’s 

publications in this field, up from 4% in 1995 (Fig. 5). However, this growing 

importance of environmental engineering publications is distributed very differently 

among the BICS countries. Especially China and India have experienced growing 

importance of publications is this field. The growth for Brazil has been rather 

modest, and there has been even a decrease in the world shares for South Africa. 

The specialization on environmental engineering literature is measured with the 

RLA (Fig. 6). Looking at the development of the specialization profile of 

publications, the following conclusions emerge: 

& China and India have experienced a strong simultaneous increase in publications as 

such and a growing importance of environmental engineering publications within the 

portfolio of publications. This is reflected by an increase in the values of the RLA. 

Fig. 4 Development of publications in the field environmental engineering in Newly Industrializing 

Countries and in the world. Source: Calculations of Fraunhofer ISI based on SCI-Data


Fig. 5 Development of world shares in the field environmental engineering in Brazil, India, China, and 

South Africa. Source: Calculations of Fraunhofer ISI based on SCI-Data 

& In Brazil, the growth of publications from environmental engineering equals the 

growth in overall publications; thus, the importance of the topic (and the value of 

the RLA) within Brazil has not been changing much. 

& The share of publications in all fields from South Africa constantly holds a share 

of 0.5% of all SCI publications over the years. The share at environmental 

engineering publications was higher than that in the past, but has been declining. 

Thus, a declining of positive RLA values results indicating that the importance of 

environmental engineering among publications is just below average now. 

Fig. 6 Development of specialization of publications in the field environmental engineering in Brazil, 

India, China, and South Africa. Source: Calculations of Fraunhofer ISI based on SCI-Data

256 R. Walz 

4.2 Analysis of patents and trade 

The shares of the NICs at the worldwide patents for the sustainability relevant 

technologies are between a few per mills to almost 2% for China and 3% for South 

Korea (Fig. 7). There are also some countries there the patent indicators show very 

limited activity in transnational patenting of sustainability technologies. On the other 

hand are some countries becoming important exporters, e.g. China with a share of 

more than 7% at worldwide exports of sustainability related technologies. 

Altogether, the NICs account for about 7% of worldwide patents, and around 20% 

of all exports of sustainability related technologies. Thus, in most NICs, the world 

trade shares are considerably higher than the patent shares. That shows that these 

countries are quite active in exporting sustainability relevant technologies, but based 

on a rather below average domestic knowledge base. Perhaps Foreign Direct 

Investment (FDI) and multinational enterprises, which produce in these countries for 

the world market, play a role in explaining this pattern. Furthermore, this also points 

towards a high importance of exports as driving force of technological catch up, a 

pattern which has been found by Malerba and Nelson (2008) for a number of sectors 

in NICs. 

The importance of the sustainability relevant technologies within the individual 

countries is also reflected in the specialization profile. The specialization indicators 

RPA, RXA or RCA show the knowledge and technological competence in 

sustainability technologies within each country compared to the average of all 

technologies. Positive values have an above average, negative values have a below 

average activity of the country regarding the sustainability relevant technologies. For 

the countries with very limited activity in international patenting of sustainability 

technologies, the use of a specialization profile was omitted. For depicting the 

Fig. 7 Share of selected Newly Industrializing Countries at transnational patents and at world exports for 

the sustainability relevant technologies. Source: Calculations of Fraunhofer ISI


specialization in trade, the RXS was used. However, the overall picture does not 

change, if the RCA is used instead of the RXA. The results in Fig. 8 show 

considerable differences between the countries: 

& Brazil (BR), Malaysia (MY), Mexico (MX) and South Africa (ZA) are 

specializing on the sustainability technologies with regard to patenting. Thus, 

the build-up of knowledge in these countries is especially strong in the fields of 

sustainability technologies. 

& In China (CN), South Korea (KR) and Argentina (AR), the specialization indices 

show an average importance of the sustainability technologies for both patents 

and exports. 

& The negative specialization profiles for India (IN) and Singapore (SG) indicate 

that the catching-up process in these countries is taking place more strongly in 

fields which are not related to the sustainability technologies. 

5 Disaggregated profile of technological capability in material efficiency 

Efficiency analyses and optimization approaches in companies very often concentrate 

on the cost factor of personnel costs. However the gross production costs in 

manufacturing contain alongside personnel costs also material and energy costs, 

depreciations and rents as well as other costs. There is an increasing public 

awareness of the significance of material efficiency. 

There are differing approaches what to include under the heading of resource or 

material efficiency. Within the context of the Material Efficiency and Resource 

Conservation Project (Maress), for example, Rohn et al. (2009) name 24 top 

technologies with a high potential of increasing resource efficiency. Some of these 

topics are rather disaggregated specific technologies which aim at increasing 

material efficient production (e.g. microreactors in chemical industry), enabling 

Specialisation Exports 

100 

0 

sustainability technologies 

-100 

-100 0 

Specialisation Patents 

100 

Fig. 8 Specialization pattern of NICs for sustainability technologies. Source: Calculations of Fraunhofer 

ISI 

BR 

CN 

IN 

ZA 

KR 

SG 

MY 

MX 

Ar

258 R. Walz 

recycling (e.g. shiftable adhesives for better separability) or resource efficient 

products (e.g. fibre substitution in clothing). Other topics are less technology 

specific, but also point to reduce the material input in production or products (e.g. 

production on demand, resource efficient design, light construction). Finally, a third 

set of topics is defined more broadly towards resource efficiency and includes areas 

such as electric vehicles, traffic systems, use of membranes in water management, or 

energy production and energy storage. 

In this paper, the field of material efficiency is defined as in between a very 

narrow and very wide interpretation. On the one hand, it does not include the third 

set of the above mentioned Maress topics which relate to the energy, water and 

transportation sector. These technologies are dealt with in this paper under the 

headings of energy supply, transport or water technologies (see Section 2.1), but they 

are not part of the material efficiency technologies. On the other hand, the topic of 

material efficiency does not only comprise “material-efficient production processes” 

and “recycling” but also the technology segment “renewable raw materials”. 

Furthermore, the level of aggregation relates to technologies, which are in most 

cases not specific to a single sector. 

The segments covered by the subsector recycling include the detection, separation 

and sorting of waste and its material recycling. The subsector of material-efficient 

processes and products is based on the fundamental idea of designing products as 

environmentally-friendly as possible. It represents a compilation of different 

measures. These include technologies such as, e. g. lightweight construction, 

lifespan extension, fiber reinforcement or corrosion protection and also more recent 

service sector concepts (e. g. car sharing, print-on-demand). The subsector of 

material-efficient production processes also incorporates various sub-aspects such as 

optimizing the production processes (e. g. by reducing wastage or by standardizing 

quality), a better utilization of appliances, systems and specialized machinery or 

optimizations which affect the whole of the value added chain. However, there are 

difficulties here with specifying these concepts in the data, especially with regard to 

trade. Thus, the numbers only include part of the important technologies. 

Many industrial sectors have a long tradition of using renewable raw materials. In 

the past, products based on renewable materials were often displaced by fossil-based 

products (e. g. celluloid, linoleum). However, more and more attention is being paid 

to renewable-based products recently because of raw material and degradability 

considerations. Both chemical raw materials (e. g. sugars and starches, oils and fats) 

and products based on renewable raw materials (e. g. polymers, adhesives, 

varnishes, and coatings) should be listed here. The trade indicators for renewable 

materials comprise technologies to produce them and selected renewable raw 

materials. Thus, the trade indicator in this subsector has to be interpreted with 

caution because the numbers are influenced not only by technological capability but 

also resource availability. This limitation does not apply to the patents in this 

subsector. More fundamentally, the use of renewable raw materials has to be 

interpreted with caution with regard to its environmental effects. Even though 

renewable raw materials have not been debated as hotly as biofuels, the same 

fundamental problems—e.g. crowding out of food production, loss of biodiversity, 

use of pesticides or high virtual water content—have to be taken into account. Thus, 

renewable raw materials cannot be judged as environmentally friendly per se, but


require a careful environmental impact assessment whose outcome depends on the 

specific framework conditions. 

The accumulated share of the 9 analyzed NICs in worldwide patents in the field 

of material efficiency is around 7.5% (for comparison: Germany reaches 17%). 

Figures 9 and 10 demonstrates that China and Korea have the largest shares among 

these NICs, followed by Brazil and India, which are on the same level. 

The indicators reveal a strong specialization of Brazil, Malaysia, South Africa and 

Argentina in both patents and exports. In addition, a very positive RPA indicates that 

Mexico is specializing on knowledge build up in material efficiency technologies, 

too. China, India, Singapore and South Korea all show below average specialization 

in the field of material efficiency. However, only for South Korea a clear negative 

RPA results, indicating that the knowledge build-up in South Korea is stronger in 

other areas than material efficiency. 

The aggregated figures for material efficiency disguise large differences between 

the different sub-sectors. The activities in Malaysia, for example, are dominated by 

renewable raw materials. The strong specialization in exports can also explained by 

the effect that the exports numbers in the sub-sector renewable resources also include 

exports of some processed natural resources. In Brazil, patenting in recycling 

technologies adds to the positive specialization in renewable resources. China and 

India have negative export specialization in all the examined sub-sectors of material 

efficiency. However, the patent specialization indicates a strong build-up of 

knowledge in renewable raw materials and material-efficient production processes 

and products. This indicates that there are efforts being made in these sub-sectors to 

build up the domestic knowledge base. Patent activities in recycling are below 

average; this implies that this sector will operate in a “low tech” mode for some 

additional time. In South Africa, there is a clear three-way split: the country shows 

strong above average competence in recycling, around average specialization for 

renewable raw materials, but is below average in material-efficient production 

Fig. 9 Shares of NICs in world exports and transnational patents in material efficiency. Source: 

Calculations of Fraunhofer ISI

260 R. Walz 

Fig. 10 Specialization profile of NICs in material efficiency. Source: Calculations of Fraunhofer ISI 

processes and products. This holds for both specialization in patents and exports. 

Mexico shows a strong positive specialization in patenting in all the sub-sectors, but 

below average specialization in trade. Thus, material efficiency seems to be one area 

Mexico is building up knowledge, without relying on foreign knowledge as much as 

in other fields. However, Mexico has not been able to translate this in above average 

export performance yet. Korea, finally, shows a clear below average specialization in 

almost all technological fields relevant for material efficiency for both patenting and 

exports. The only exception is the field of material efficient production processes and 

products, where the indicator values point to a substantial knowledge build up. 

To sum up the results: almost all of the analyzed NICs show positive patent 

specialization in the field of material efficiency. Thus, among the sustainability 

technology fields, material efficiency seems to be a field in which the NICs are 

especially building up their knowledge base. The disaggregated analysis shows that 

there are different rationales which can explain the specialization pattern: For Brazil, 

Malaysia and Argentina, the natural resource availability in these countries and the 

related export potential call for further build up in the knowledge base of associated 

technologies along the value chain. However, other technological areas are also 

contributing to the knowledge build up, e.g. recycling in Brazil and very strongly in 

South Africa. On the other end of the spectrum are Singapore and South Korea, which 

are already highly successful in various manufacturing fields, but put a below average 

emphasis on material efficiency. India and China both show a negative trade 

specialization. The positive patent specialization is more likely to be explained by the 

efforts made to build up domestic knowledge competences, in order to augment the 

strategies of securing access to raw materials from abroad with additional options to 

reduce the demand for these raw materials. 

6 Conclusions and outlook 

Global environmental sustainability requires that environmentally friendly technologies 

are put in place all over the world. Environmental Economists stress the


opportunities for NICs to use the latest environmentally more friendly technology, 

leading to a technological leapfrogging. However, this requires an interest of the 

NICs to push in this direction. One perspective is that these technologies help to 

reduce national environmental problems and to modernize the infrastructure. 

Another incentive is that by moving towards the latest sustainability relevant 

technologies, NICs might gain enough competences in order to compete on the 

world market in this growing market segment. Both perspectives require that NICs 

build up (technological and institutional) competences in the field of these 

technologies and their diffusion. 

In this paper, a first picture on the existing (technological) competences of NICs 

in the field of sustainability relevant technologies is presented. Various indicators are 

used, which are, however, not without caveats. Thus, the results must be interpreted 

with caution. 

The various indicators do not show a clear-cut picture. The differences in the 

results for the general innovation capabilities between the survey based methodology 

and the general R&D indicators (see chapter 3) point to the importance of not only 

relying on a single indicator. Nevertheless, there are some very robust results: The 

general innovation capabilities differ substantially within NICs, with Korea and 

Singapore showing the most favorable general innovation conditions and the highest 

absorptive capacity for new technologies. 

The innovation indicators with regard to the sustainability relevant technologies 

also show that NICs are highly heterogeneous. Furthermore, the increase in 

capabilities varies, but is especially high in the South (East) Asian countries. 

Combining the different criteria (Table 1), the following clusters can be observed: 

& higher level of general absorptive capability, but without specialization on 

sustainability technologies: Korea, Singapore, Taiwan (and perhaps China, 

especially if the overall size of the country is taken into account), 

& specialization on sustainability with a medium overall level of general absorptive 

capability: Brazil, Malaysia, Mexico, South Africa, 

& medium overall level of general absorptive capability, without specialization on 

sustainability technologies: Argentina, India, and Chile, 

& lower overall level of technological capability: Venezuela, Thailand, Philippines, 

Indonesia. 

The analysis also reveals that there are quite considerable differences between the 

technological sustainability areas within the NICs, which are reflected in the 

specialization patterns. In general, NICs specialize more on material efficiency than 

on the other sustainability technologies. Thus, especially material efficiency seems to 

be a promising field for leapfrogging. For some of the NICs, the high specialization 

on material efficiency technologies can be traced back to a very high specialization 

on renewable resources (e.g. Malaysia, Brazil). This can be explained by the 

availability of natural resource base in these countries, which make an augmentation 

with technological competences in this field especially attractive. In other NICs, e.g. 

China and India, there is a tremendous increase in the build up of knowledge in 

material efficiency. This can be perhaps explained by the need to augment traditional 

strategies to secure resource availability by the additional option of material 

efficiency.

262 R. Walz 

Table 1 Overview of indicator results 

Country Survey based 

indicators on 

innovation 

capability 

General 

R&D 

indicators 

Specialization 

on sustainability 

technologies 

Increase 

in sust. 

capabilities 

Specialization 

on material 

efficiency 

China Medium Rather high Average High Average 

India Medium Medium Negative High Average 

Brazil Rather low Medium Positive medium Positive 

S. Africa Medium Medium Rather positive lower Positive 

Singapore High High Negative High Rather neg. 

Korea Rather high High Average High Negative 

Mexico Rather low Rather low Positive Rather high Rather pos. 

Malaysia Rather high Medium Rather positive High Positive 

Argentina Low Rather low Average medium Positive 

Even though there is still a high dependency of technology imports in a lot of the 

areas analyzed, the overall picture does not reflect a “classical” dependency of the 

NICs on the traditional industrial countries as technology providers. In addition to 

the countries which have already obtained an above average position in some 

sustainability relevant technologies, the international patent activities show— 

particularly in China, India and Malaysia—an enormous upward trend. The same 

holds for the development of publications in environmental engineering. In this 

respect it might seem realistic that some of the NICs will also become more and 

more successful in these technology areas in the future. Furthermore, the results 

differ with regard to the disaggregated technology areas. Thus, there are 

complementary strengths within NICs, which also open up the potential for 

increased South-South cooperation in the future technology development. Examples 

are the use of renewable resources or various forms of renewable energy, which have 

a high diffusion potential for almost all NICs, and considerable technological 

expertise in some NICs. 

However, moving towards a greater role for sustainability technologies also 

requires additional efforts by the NICs. First of all, higher attention must be paid to 

sustainability technologies within the national research priorities. The analysis of 

Walz et al. (2008) shows that in none of the BICS countries the research and 

innovation policy is especially aimed at decoupling environment and resource 

consumption from the economic development. In all BICS countries, the general 

support of the innovation activity in the business sector has priority. By and large, 

the sustainability research within the Science & Technology policy of the BICScountries 

is not institutionally differentiated. Mostly the sustainability topics are 

integrated into general, technology-independent funding instruments. Thus, sustainability 

issues do not represent an own field of the research support. This calls for a 

research policy which specifically targets sustainability. 

Another policy issue relates to demand. The supply oriented R&D policies have 

to be augmented with a demand oriented innovation policy. The demand for the 

sustainability technologies is strongly influenced by the (environmental) regulatory


system. Thus, the latter must be tailored to enhance further innovations. 

Strengthening environmental regulation must be seen not as a trade-off between 

environmental protection and economic development within the NICs, but as an 

instrument of demand side driven innovation policy in one of the most dynamic 

growing economic sectors. This also calls for integration of the traditional R&D 

policies with the demand side oriented policies, which are typically performed by 

different actors—a challenge which is not unique to NICs, but which can be found in 

almost every OECD country, too. 

The analysis in this paper relied on various indicators. However, the limits of such 

an indicator approach have to be kept in mind: the indicators serve as a proxy for 

both the absorptive capability of the NICs for sustainability innovations and the 

ability to compete on international technology markets. However, the indicators of 

technological capability should not be misinterpreted as a proxy for measuring if the 

country moves towards sustainability. They neither cover the diffusion of the 

technology nor the contribution of the potentially sustainable technology towards 

environmental improvement. Thus, this indicator approach does not allow answering 

the question, whether the incentives for moving towards environmentally friendly 

production and products are stronger than the incentive stated in the pollution haven 

hypothesis. More empirical research is needed to come up with answers for this 

question. 

The used indicator concepts have been derived from experience within OECD 

countries for goods with above average technological content. Even though 

sustainability technologies are typically also having an above average technology 

content, there still might be a problem that the indicators do not account for 

innovations which are not internationally patented because of a low propensity to 

patent in the country/region or because the innovation is taking place in sectors 

where it is more difficult to obtain patents (e.g. services). 

There are also missing factors which the indicators cannot account for. Due to 

the environmental externality problem, the formation of demand depends strongly on 

environmental policy. Thus, together with the problem of externalities of R&D, 

environmental innovations face a “double externality problem” (Rennings 2000). 

Furthermore, especially sustainability innovations are rather often associated with 

sectors which are subject to economic regulation. Thus, sustainability technologies 

in these sectors even face a triple regulatory challenge (Walz 2007). This also leads 

to the conclusion that policy coordination between the different regulatory regimes 

becomes a major challenge for policy making. However, there is the need for further 

empirical research to analyze if and how NICs are coping with this challenge. 

Social factors are another issue which play a very important role, but are not 

adequately addressed in the indicator approach so far. The importance of innovations 

in institutions, or knowledge spillovers from other sectors can be added to that list, 

together with the important aspects of communication patterns within the system of 

innovation, lock-ins, path dependency, and power structures within industry and 

politics (Walz and Meyer-Krahmer 2003). 

Thus, to sum up the argument, indicators can be helpful to give an overview and 

form a basis for a first assessment of likely strengths and weaknesses of countries, 

and the resulting (economic) perspectives of leapfrogging in the fields of 

sustainability technologies. However, they are not able to answer all of the arising

264 R. Walz 

questions alone. Clearly the use of such indicators must be accompanied by careful 

interpretations, reflections about the limits of the indicators, and additional analysis 

on the linkages between the actors in the innovation system, their interactions with 

the numerous institutions, and the nature of the learning processes taking place. 

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DOI 10.1007/s10368-010-0162-z 


Eco-innovation for environmental sustainability: 

concepts, progress and policies 

Paul Ekins 



Abstract There is increasing scientific evidence that natural systems are now at a level 

of stress globally that could have profound negative effects on human societies 

worldwide. In order to avoid these effects, one, or a number of technological transitions 

will need to take place through transforming processes of eco-innovation, which have 

complex political, institutional and cultural, in addition to technological and economic, 

dimensions. Measurement systems need to be devised that can assess to what extent 

eco-innovation is taking place. Environmental and eco-innovation have already led in a 

number of European countries to the establishment of substantial eco-industries, but, 

because of the general absence of environmental considerations in markets, these 

industries are very largely the result of environmental public policies, the nature and 

effectiveness of which have now been assessed through a number of reviews and case 

studies. The paper concludes that such policies will need to become much more 

stringent if eco-innovation is to drive an adequately far-reaching technological transition 

to resolve pressing environmental challenges. Crucial in the political economy of this 

change will be that eco-industries, supported by public opinion, are able to counter the 

resistance of established industries which will lose out from the transition, in a reformed 

global context where international treaties and co-operation prevent the relocation of 

environmentally destructive industries and encourage their transformation. 

Keywords Eco-innovation . Environmental sustainability . Technological 

transitions . Eco-industries . Innovation policies 


Given the scale of contemporary environment and resource challenges in relation to 

climate change, energy and other resources, and biodiversity, it is common to hear 

Acknowledgements The author would like to thank two anonymous referees for helpful comments on an 

earlier draft of this paper. 

P. Ekins (*) 

UCL Energy Institute, University College London, London, UK 

e-mail: p.ekins@ucl.ac.uk

268 P. Ekins 

international bodies and policy makers at both international and national levels call 

for major changes in most aspects of contemporary resource use and interactions 

with the natural environment. To give just one example, in 2005 the Synthesis 

Report of the Millennium Ecosystem Assessment (MEA) concluded: “The challenge 

of reversing the degradation of ecosystems while meeting increasing demands for 

their services ... involve significant changes in policies, institutions, and practices 

that are not currently under way.” (MEA 2005, p.1) 

The scale of the changes that seem to be envisaged goes well beyond individual 

technologies and artefacts, and involves system innovation through what the 

literature calls ‘a technological transition’. However, clearly it is not just any 

technological transition that is being advocated in response to these challenges, but 

one that greatly reduces both environmental impacts and the use of natural resources. 

The innovation that could lead to such a transition has been variously called 

environmental or eco-innovation, with a key role for environmental technologies. 

The European Union has adopted an Environmental Technologies Action Plan 

(ETAP), 1 and in May 2007 the European Commission published a report (CEC 

2007) on trends and developments in eco-innovation in the European Union, which 

confirmed the strong growth of environmentally related industries, also called ecoindustries, 

while emphasising that the state of the environment and climate change 

call for the take-up of clean and environmentally-friendly innovation “on a massive 

scale”, 2 and proposing “a number of priorities and actions that will raise demand for 

environmental technologies and eco-innovation”. Similarly, the Background Statement 

for the OECD Global Forum on Environment on Eco-innovation 3 in November 

2009 declares: “Most OECD countries consider eco-innovation as an important part 

of the response to contemporary challenges, including climate change and energy 

security. In addition, many countries consider that eco-innovation could be a source 

of competitive advantages in the fast-growing environmental goods and services 

sector.” Similarly the goal of ETAP was explicitly to achieve a reduction in resource 

use and pollution from economic activity while underpinning economic growth. This 

linkage between environmental challenge and economic opportunity recurs 

throughout discussion of eco-innovation. Section 2 considers both the nature of 

eco-innovation, while Section 3 discusses how it might be measured. Section 4 looks 

at some developments in the eco-industries in Europe. 

The development of eco-industries is driven by public policies. Section 5 

looks at the kinds of environmental policies that have been implemented and 

presents some evidence as to which have been most effective. What is clear is that 

the introduction of such policies has been and continues to be contested. However, 

it is also the case that there is little to be gained environmentally if such policies 

simply result in the relocation of such industries to parts of the world that do not 

introduce them. This illustrates the importance of global agreements if countries 

are to be able to stimulate environmental innovation without loss of competitive 

advantage. 

1 See the ETAP website at http://ec.europa.eu/environment/etap/actionplan_en.htm. 

2 See http://ec.europa.eu/environment/news/brief/2007_04/index_en.htm#ecoinnovation. 

3 See http://www.oecd.org/document/48/0,3343,en_2649_34333_42430704_1_1_1_37465,00.html.

Eco-innovation for environmental sustainability 269 

2 A technological transition through eco-innovation 

Technologies do not exist, and new industries and technologies are not developed, in 

a vacuum. They are a product of the social and economic context in which they were 

developed and which they subsequently help to shape. The idea of a technological 

transition therefore implies more than the substitution of one artefact for another. It 

implies a change from one techno-socio-economic system (or ‘socio-technical 

configuration’ as it is called below) to another, in a complex and pervasive series of 

processes that may leave little of society unaffected. 

There is now an enormous literature on technological change and the broader 

concept of technological transition, ranging from relatively simple descriptions of 

the way technologies are developed and diffused in society in terms of ‘technologypush/market-pull’ 

(e.g. Foxon 2003; Carbon Trust 2002), to theories that emphasise 

transition management and the co-evolution of socio-economic systems (e.g. 

Freeman and Louça 2001; Bleischwitz 2004, 2007; Nill and Kemp 2009) and 

multi-level interactions between technological niches and socio-technical regimes 

and landscapes (Geels 2002a, b). These theories are discussed in some detail in 

Ekins 2010 (forthcoming), and see the papers by Kemp and Walz (this issue). 

However such changes are conceptualised, to achieve the radical improvements in 

environmental performance that are required they will need to be driven by 

processes of innovation that emphasise the environmental dimension, which have 

variously been called eco-, or environmental, innovation. 

Innovation is about change. Moreover, in the economics literature it always means 

positive change, change which results in some defined economic improvement. 

Similarly, in respect of the environment, environmental innovation means changes that 

benefit the environment in some way. In the ECODRIVE project (Huppes et al. 2008) 

the now much-used term ‘eco-innovation’ was defined as a sub-class of innovation, 

the intersection between economic and environmental innovation, i.e. “eco-innovation 

is a change in economic activities that improves both the economic performance and 

the environmental performance of society” (Huppes et al. 2008, p.29). In other words, 

Economic Performance 

Absolute 

Deterioration 

R 

Eco- 

Innovation 

Environmental Performance 

R = Reference for comparison 

Fig. 1 Eco-innovation as a sub-class of innovation

270 P. Ekins 

Factors: 

Knowledge 

implemented: 

Performance: 

Economic, Cultural, Institutional and 

Policy Incentives for Eco-Innovation: 

Supply Push 

Demand Pull 

Propositional 

Knowledge 

Prescriptive 

Knowledge 

Applied Eco- 

Innovation 

Eco-Innovation 

Performance 

Fig. 2 Knowledge creation and eco-innovation performance. Source: Huppes et al. 2008, p.23 

whether or not eco-innovation has taken place can only be judged on the basis of 

improved economic and environmental performance. 

This is illustrated in Fig. 1. Innovation (compared to the reference technology R, 

which defines the current economy-environment trade-off along the curved line) that 

improves the environment, (environmental innovation) is to the right of the vertical 

line through R and the curved line. The lighter shaded area shows where improved 

environmental performance has been accompanied by deteriorating economic 

performance. Similarly, economic innovation is above the horizontal line through 

R and above the curved line. The lighter shaded area in this case shows where 

improved economic performance has been accompanied by environmental deterioration. 

Eco-innovation is the darker shaded area where performance along both axes 

has improved. Figure 2 relates this conception to the two kinds of knowledge— 

propositional and prescriptive—identified by Mokyr (2002), illustrating how this 

knowledge is pushed and pulled through to eco-innovation performance by the 

economic, cultural, institutional and policy incentives supplied by markets and 

governments. 

Another approach to conceptualising eco-innovation was taken by the so-called 

MEI European Framework 6 research project. 4 This adopted a different definition of 

eco-innovation from the ECODRIVE project, defining it as “the production, 

application or exploitation of a good, service, production process, organisational 

structure, or management or business method that is novel to the firm or user and 

which results, throughout its life cycle, in a reduction of environmental risk, 

pollution and the negative impacts of resources use (including energy use) compared 

to relevant alternatives.” (Kemp and Foxon 2007, p.4). Close inspection of this 

definition reveals that the only difference between this and the ECODRIVE 

definition is that it does not insist on improved economic as well as improved 

environmental performance. In other words, it is what is called above ‘environmental 

innovation’, the light as well as the darker shaded areas in Fig. 1 to the right of the 

vertical line through R and the curved line (the ‘relevant alternative’). Both 

ECODRIVE and MEI identify that a requisite of eco-innovation is improved 

environmental performance or results. For the concepts to be operational, it is 

necessary to be able to measure the extent to which eco- or environmental 

innovation are being achieved. 

4 See http://www.merit.unu.edu/MEI/.


3 Measuring eco-innovation 

There are now well developed frameworks for the measurement of innovation in 

general, such as the European Innovation Scoreboard, 5 which is reported on an 

annual basis. The same is not true for environmental or eco-innovation, although the 

OECD now has in hand a programme of work in this area, described in OECD 

(2009), which seeks to develop “indicators of innovation and transfer in 

environmentally sound technologies (EST)”, and concludes that the most promising 

approach in both areas is the use of suitably selected and structured patent data. 

Some of its early work on patents as an indicator of environmental innovation is 

reported in OECD (2008). 

The MEI project derived a list of possible indicators of eco-innovation (using the 

MEI terminology), which cover a wide area, including products, firms, skills, 

attitudes, costs and policies (Kemp and Pearson 2008, pp.14–15). However, the 

proposed indicators actually focus on the predisposing conditions for environmental 

improvement rather than on whether the environmental improvement has actually 

taken place. There are no indicators of environmental performance per se. There is 

presumably an assumption that the areas covered are likely to have a positive 

relationship with environmental performance. Many of the areas derive from or are 

closely related to measures of environmental policy, the implications of which for 

eco-innovation are discussed in Section 4. In line with MEI’s exclusively 

environmental definition of eco-innovation, its list of proposed indicators gives no 

attention to economic performance or results at all. 

As noted above, the ECODRIVE project proceeded in contrast from the 

perception that eco-innovation needs to deliver improvements in both economic 

and environmental performance and therefore sought to determine how this joint 

outcome could be indicated. The project came up with numerous suggestions for 

how economic and environmental performance could be measured, at different 

economic and spatial levels. In principle, the methodologies for the measurement of 

environmental performance are now quite well developed, and were discussed in 

detail in Huppes et al. (2008, pp.64ff.) and will not be further considered here. 

Economic performance, however, is another matter. 

The purpose of economic activity is to deliver functionalities that meet human 

needs and wants, at a cost consumers (which may be individuals or businesses) are 

prepared to pay. In Fig. 3 the functionalities are delivered by processes and products 

(including services) produced by firms, which may be classified as belonging to 

economic sectors, and which have supply chains consisting of firms which may 

belong to different sectors. The sectors will belong to a national economy. 

The most basic measure of improved economic performance for products and 

processes is therefore one which can show that greater functionality is being 

delivered for the same cost, or the same functionality is being delivered for reduced 

cost. The basic measure is therefore Functionality/Cost, where functionality may be 

measured in a wide variety of different ways, depending on the product or process 

under consideration. 

5 See http://www.proinno-europe.eu/index.cfm?fuseaction=page.display&topicID=5&parentID=51.

272 P. Ekins 

COUNTRIES 

SECTORS 

SUPPLY CHAIN 

FIRMS 

PROCESSES 

PRODUCTS 

PROCESSES 

FUNCTIONALITIES 

Energy 

Warmth (space, 

water) 

Transport 

Light 

Power (for other 

services) 

Nutrition 

Water 

Flushing 

Washing 

Cooking/drinking 

Shelter 

Furnishing 

Tourism 

Fig. 3 The delivery of functionality in an economy. Source: Huppes et al. 2008, p.53 

For example, in the case of transport, the unit of functionality may be (vehicle-km), 

and the cost to the owner will be the life-cycle cost of acquiring, operating and disposing 

of the vehicle over the period of ownership. However, it should be borne in mind that 

many products have multiple functionalities, so that in comparing the functionalities of 

different products, one must be careful to compare like with like. For example, cars have 

many functionalities apart from the delivery of vehicle-km (an obvious one is conferring 

status, or making a social statement), so that it is important when comparing products 

like cars that they are as similar as possible in terms of other functionalities. The ‘ecoinnovative 

product or process’ will then be one which delivers greater functionality per 

unit cost and improves environmental performance. 

Products and processes are produced or operated by firms. Clearly a firm may 

have different products and processes, delivering different functionalities, so a 

complete view of its performance will require some aggregation across these 

different outputs. Normally this aggregate is expressed in money terms, so that 

measures of a firm’s performance will often be some measure of economic (money) 

output compared with economic inputs (e.g. value added, profitability, labour 

productivity), sometimes compared with other firms (e.g. market share). The ‘ecoinnovative 

firm’ will then be one which improves its economic performance while 

also improving its environmental performance. Firms are conventionally grouped 

into economic sectors, obviously introducing a higher level of aggregation. Many of 

the measures of sectoral economic performance are the same as for firms and will 

consist of an aggregate, or average, of the sectors’ firms’ performance. And then 

sectors are aggregated into national economic statistics. 

One critical issue in the consideration of economic performance is time. 

Economies are inherently dynamic, and the consideration of timescale will be 

Etc. 

ENVIRONMENTAL IMPACTS 

Depletion, Pollution (air, water, land), 

Occupation (space, biodiversity)


crucially important to a judgement as to whether or not economic performance has 

improved. Many new technologies, and new firms, are not ‘economic’ to begin with 

(i.e. they deliver lower functionality per unit cost than incumbents). There is always 

a risk in investment that it will not pay off, and different investments pay off, when 

they do, over different periods of time. In any evaluation of economic performance, 

the timescale over which the evaluation has been conducted should therefore be 

made explicit. 

An example may be renewable energy, and the ‘feed-in’ tariffs which a number of 

countries have introduced to promote it. At present most such energy is not 

economic (i.e. it is more expensive per kWh delivered than a non-renewable 

alternative). That is why it needs the subsidy of a feed-in tariff. In the short term, 

therefore, it does not deliver enhanced economic performance and therefore, despite 

its enhanced environmental performance, it is an environmental innovation, rather 

than an eco-innovation, as the terms are used here. 

However, this situation may change. Mass deployment of renewable energy 

technologies through feed-in tariffs may engender learning by doing or economies of 

scale, reducing unit costs (see Fig. 9 below for PV). The costs of competitors (e.g. 

the price of fossil fuels) may rise. Other countries may decide to deploy these 

technologies, generating export markets. All these developments are likely to take 

time. Provided that economic performance is computed over that time, it may well 

be that an environmentally-improving new technology (i.e. an environmental 

innovation) which in the short term was an economic cost actually turns out to 

deliver enhanced economic performance, and therefore to be an eco-innovation. 

For any product or process which delivers improved environmental performance, 

there are therefore three possibilities: 

○ It immediately delivers improved economic performance as well (e.g. 

compact fluorescent light bulbs, some home insulation), in which case it is 

unequivocally an eco-innovation 

○ It does not deliver immediately improved economic performance, in which 

case it is only a potential eco-innovation which 

& Becomes an actual eco-innovation when its economic performance 

improves and it is widely taken up (a process which may take 

decades or even centuries) 

& Never becomes an eco-innovation because its economic performance 

never improves adequately 

The boundary within which economic performance is considered is also a relevant 

consideration. For example, although the feed-tariff is currently a net economic cost for 

the German economy as a whole (because the energy produced is more expensive than 

non-renewable energy), for the producers of renewable energy it may result in highly 

profitable businesses. If the boundary of the calculation of ‘economic performance’ is just 

those businesses, clearly the economic performance picture will be positive. If it is the 

national economy, and the German renewable energy businesses are focused on the 

German market, a different picture will emerge, and the overall change in economic 

performance may be negative. If, again, the German renewable energy industries generate 

significant exports, this may make their overall effect on the German economy positive.

274 P. Ekins 

Another example relates to the market boundary being considered. Many markets 

are highly imperfect and exhibit many market failures, especially in respect of 

environmental impacts. An economic activity may be highly successful in market 

terms (i.e. deliver a certain functionality at low cost, and result in profitable 

businesses), but generate environmental costs which actually exceed the market 

benefits. Similarly, an environmentally preferable activity may seem to be 

uneconomic in market terms, but actually be socially desirable because of the 

environmental benefits it delivers. It is obviously important that analysis takes the 

full picture (all the market and external costs and benefits) into account, but because 

of uncertainties in the monetary valuation of external costs and benefits it may not be 

possible to say definitively whether they change the picture as revealed by markets. 

Because of the existence of market failures like environmental externalities, 

environmental innovations may be socially desirable even if they are not ecoinnovations, 

if the social judgement is that the environmental benefit outweighs their 

economic cost. For example, it may well be that, because of their reduction in carbon 

emissions, renewable energy technologies are highly desirable socially, even if at 

present they are not eco-innovations (though over time they may become so, as 

discussed above). Eco-innovations are always socially desirable (because they are 

win-win across the environmental and economic dimensions). 

The argument can be extended to incorporate the socio-economic and cultural 

dimensions, in line with the ‘sub-systems’ approach of Freeman and Louça (2001), 

as shown in Fig. 4. This shows that the outcomes of economic activity (processes, 

products, firms, which are conceived as satisfying consumer demands for services as 

in Fig. 3) of interest in relation to environmental and eco-innovation are economic 

and environmental performance. Economic activity is driven by institutions, the 

framework of laws, norms and habitual practices that define how markets and other 

economic structures (e.g. public sector, households/families as sources of production) 

operate. These institutions in turn derive from an interaction between polity and 

culture. There are multiple feedbacks between the boxes as shown and the whole 

socio-economic cultural construct should be thought of as a system in dynamic 

evolution. 

The drivers of eco-innovation are in the first place institutions, and in the second 

place the polity (which produces policies that feed into, or become, institutions) and 

culture, (e.g. social values), which also feed into or create new institutions. Both 

polity and culture are affected both by institutions, and by the economic and 

environmental performance of economic activities. In addition to indicators of 

economic and environmental performance, the ECODRIVE project also derived 

Polity 

Culture 

Institutions 

Economic 

activity 

(processes, 

products, 

firms) 

Economic 

performance 

Environmental 

performance 

Fig. 4 The socio-economic cultural system in dynamic evolution. Source: Author


predictive institutional, policy and cultural indicators (including those based on 

societal values) that might be used to show whether eco-innovation was likely to 

take place (see Huppes et al. 2008). Many of these predictive indicators gives 

insights into the political economy interactions between the social, political, 

economic and cultural forces and processes discussed above that will jointly 

determine whether eco-innovation takes place or not. 

Oosterhuis and ten Brink (2006) show that there is widespread agreement in the 

literature that environmental policies have the potential to exert a strong influence on 

both the speed and the direction of environmental innovation. Rather than being an 

autonomous, ‘black box’ process, technological development is nowadays acknowledged 

(as illustrated in the previous section), to be the result of a large number of 

different factors that are amenable to analysis. Environmental policy can be one of 

these factors, even though its relative importance may differ from case to case. The 

policies which might promote environmental innovation and eco-innovation are the 

subject of Section 5. 

Of crucial importance to delivering both the improved economic and environmental 

performance of the ECODRIVE definition of innovation is that sub-set of 

economic activity shown in Fig. 4 that is explicitly concerned with environmental 

outcomes, the numerous firms and sectors now grouped under the heading of ‘ecoindustries’, 

to brief consideration of which this paper now turns. 

4 The nature and growth of eco-industries 

Eco-industries are likely to come about through a mixture of environmental 

innovation and eco-innovation. 

Classifying ‘eco-industries’, also called the environmental, or environmental goods 

and services, industry, is not straightforward. Enterprises engaged in many different types 

of activities are involved, making it difficult to single out environmental protection 

products within the standard international classification of industrial activities (ISIC). An 

OECD/Eurostat Informal Working Group on the Environment Industry was established 

in 1995 to address the issues and develop a common methodology. The working group 

agreed on the following definition of the environment industry: 

‘The environmental goods and services industry consists of activities which produce 

goods and services to measure, prevent, limit, minimise or correct environmental 

damage to water, air and soil, problems related to waste, noise and eco-systems. 

This includes cleaner technologies, products and services that reduce environmental 

risk and minimise pollution and resource use.’ (OECD/Eurostat 1999) 

Environmental industries thus fall into three main groups 6 : 

A. Pollution management group: Includes Air pollution control; Wastewater 

management; Solid waste management; Remediation and clean-up of soil and 

water; Noise and vibration abatement; Environmental monitoring, analysis and 

assessment 

6 A more detailed list can be found in Annex 1 and Annex 7 of ‘The Environmental Goods and Services 

Industry: Manual for Data Collection and Analysis’ (OECD/ EUROSTAT, 1999).

276 P. Ekins 

B. Cleaner technologies and products group: Activities which improve, reduce 

or eliminate environmental impact of technologies, processes and products (e.g. 

fuel-cell vehicles) 

C. Resource management group: Prime purpose of activities is not environmental 

protection but resource efficiency and development of new environmentally 

preferable resources (e.g. energy saving, renewable energy plant) 

A specific feature of environmental technology is the particular mechanism by 

which the environmental impact is reduced. The following types are often 

distinguished: 

& ‘End-of-pipe’ technology (isolating or neutralizing polluting substances after 

they have been formed). End-of-pipe technology is often seen as undesirable 

because it may lead to waste that has to be disposed of. 7 

& ‘Process-integrated’ technology, also known as ‘integrated’ or ‘clean’ technology. 

This is a general term for changes in processes and production methods (i.e. 

making things differently) that lead to less pollution, resource and/ or energy use. 

& Product innovations, in which (final) products are developed or (re)designed that 

contain less harmful substances (i.e. making different things), use less energy, 

produce less waste, etcetera. 

Eco-industrial activities have been distributed across many industrial sectors for a 

number of years. For example, OECD/Eurostat 1999 (Annex 6) showed that in 1992 

the environment industry in Germany was significant (in descending order of 

importance) in the following standard sectors: machinery, instruments and 

machinery, ceramics, electronics, fabricated metal products, plastics, rubber, textiles, 

non-metallic mineral products, vehicles, chemicals, pulp and paper, and iron, steel 

and metals. 

4.1 The eco-industries in the European Union 

Following the recommendations of the environment industry working group, 

national statistical classification systems are being revised to include separate items 

for the environment industry. In the future, this will allow for easier identification 

and analysis of this cross-cutting industry. 

Because of the difficulties involved in classifying the environment industry, only 

a very limited amount of data on the size of this industry can be retrieved from 

standard national statistical sources. In recognition of this data gap the European 

Commission (DG Environment) published a comprehensive study: ‘Eco-industry, its 

size, employment, perspectives and barriers to growth in an enlarged EU’ (EC 

2006). The study is based on data on environmental protection expenditures 

provided by Eurostat and a number of interviews with representatives of the industry 

and administration. Jänicke and Zieschank (2010, forthcoming) are among those 

who have stressed the unsatisfactory nature of current statistical classifications of the 

7 This is not necessarily the case, though. For example, reducing nitrogen oxides at the end of a 

smokestack or car exhaust produces the harmless substances nitrogen and oxygen, which are natural 

components of the air (although even then particles from the platinum catalyst from the vehicle’s catalytic 

converter may cause pollution).


sustainable resource management and environment industries, which tend greatly to 

underestimate the industries’ quantitative significance, and the following numbers 

need to be interpreted in that light. 

The estimated total turnover of eco-industries in 2004 in the EU-25 is €227 

billion (Fig. 5). The largest eco-industries are solid waste management and 

wastewater treatment (both around €52 bio.) and water supply (€45 bio.). The 

countries with the largest eco-industry sectors are Germany (€66.1 bio.) and France 

(€45.9 bio.), followed by the UK (€21.2 bio.) and Italy (€19.2 bio.). 

Pollution management activities make up 64% of total turnover in 2004, resource 

management activities account for the remaining 36%. Figure 6 shows the split 

between pollution and resource management activities for the EU-25 countries. 

Germany and France together account for roughly half of both pollution and 

resource management activities. In the UK a higher proportion of activities fall into 

the resource management category, 11.2% versus 8.4% pollution management 

activities. 

Across the EU-15 the eco-industry grew by around 7% (constant €) from 1999– 

2004 (DG Environment 2006, p.33), although the growth rates for different EU 

countries vary widely. Around 3.4 million jobs (full-time equivalent, direct and 

indirect employment) are attributed to the eco-industries, over two-thirds of which 

fall into the pollution management category. Figure 7 shows the distribution of 

employment across the sectors. The three largest employers are the solid waste 

management sector accounting for just over 1 million jobs, followed by wastewater 

treatment (800 thousand) and the water supply sector (500 thousand). 

million 

50000 

40000 

30000 

20000 

10000 

0 

solid waste management 

Source: EC 2006 

waste water treatment 

water supply 

recycled materials 

air pollution control 

Fig. 5 Eco-industry turnover in 2004, EU-25 

general public admin 

renewable energy 

private env management 

nature protection 

remediation & clean up 

noise & vibration 

environm. R&D

278 P. Ekins 

30.0 

25.0 

20.0 

15.0 

10.0 

5.0 

0.0 


Fig. 6 Eco-industry turnover as % of EU-25 

in '000 

1000 

800 

600 

400 

200 

0 

solid waste management 


waste water treatment 

water supply 

recycled materials 

air pollution control 

Fig. 7 Eco-industry employment in 2004, EU-25 

Germany 

France 

UK 

Italy 


Austria 

Spain 

Denmark 


Belgium 

Sweden 


Portugal 

Hungary 

Greece 



Slovenia 

Slovakia 

Lithuania 

Luxembourg 

Estonia 

Latvia 

Cyprus 

general public admin 

private env management 

remediation & clean up 

pollution management 

resource management 

noise & vibration 

nature protection


4.2 Eco-industries’ diffusion and cost-reduction 

Oosterhuis and ten Brink (2006) note that new technologies, when they are 

successful in being applied and finding their way to the market, often follow a 

pattern in which the uptake starts at a low speed, then accelerates and slows down 

again when the level of saturation approaches. This is reflected in the well-known 

logistic or S-curve (see Fig. 8). 

The acceleration in uptake is not only due to the fact that the technology is 

becoming more widely known, but also to improvements and cost reductions 

occurring in the course of the diffusion process due to economies of scale and 

learning effects. Cost reductions as a function of the accumulative production (or 

sales) of a particular technology can be represented by ‘learning curves’ or 

‘experience curves’. Figure 9 shows a learning curve for photovoltaic energy 

technology. The ‘learning rate’ (the percentage cost reduction with each doubling of 

cumulative production or sales) persisted throughout three decades of development 

of the technology. 

IEA (2000) has assessed the potential of experience curves as tools to inform and 

strengthen energy technology policy. It stresses the importance of measures to 

encourage niche markets for new technologies as one of the most efficient ways for 

governments to provide learning opportunities. McDonald and Schrattenholzer 

(2001) have assembled data on experience accumulation and cost reduction for a 

number of energy technologies (including wind and solar PV). They estimated 

learning rates for the resulting 26 data sets, analyzed their variability, and evaluated 

their usefulness for applications in long-term energy models. Junginger (2005) 

applied a learning curve approach to investigate the potential cost reductions in 

renewable electricity production technologies, in particular wind and biomass based. 

He also addressed a number of methodological issues related to the construction and 

use of learning curves. 

Several studies have been carried out to assess the quantitative relationship 

between the development of costs of environmental technologies and time. A TME 

study (1995) pioneered this, and RIVM (2000) further explored the consequences of 

prototypes demo niche early adopters mass application laggards saturation 

Fig. 8 Stages in the introduction of a new technology; the S-curve

280 P. Ekins 

Source: Harmon, 2000 

Fig. 9 Learning curve of PV-modules, 1968–1998 

this phenomenon. Several other studies address this issue (e.g. Anderson (1999), 

Touche Ross (1995)). 

Both RIVM and TME conclude that the reduction of unit costs of environmental 

technologies goes faster than the—comparable—technological progress factor that is 

incorporated in macro-economic models used by the Netherlands Central Planning 

Bureau. In these models the average factor is about 2% annually. The results of both 

the RIVM and TME study for the annual cost decrease of environmental 

technologies are presented in Table 1. 

Both studies show comparable results: the annual cost decrease is mostly between 

4% and 10%. Therefore, when modelling environmental costs for the longer term, 

some form of technological progress needs to be taken on board in addition to what 

is assumed in the macro-economic model. 

In the TME and the RIVM study no attempt was made to differentiate between 

two types of technological progress (see Krozer 2002): 

Table 1 Annual decrease in costs of applying environmental technologies 

Technology/Cluster Annual cost decrease 

Min Average Max 

Dephosphating sewage 3.8% 6.7% 

Desulphurisation of flue gas at power stations 4% 10% 

Regulated catalytic converter 9% 10.5% 

Industrial low NOx technologies 17% 31% 

1. High efficiency central heating 1.4% 

2. Energy related technologies 4.9% 

3. End-of-pipe, large installations 7.6% 

4. End-of-pipe, small installations (catalysts) 9.8% 

5. Agriculture low emission application of manure 9.2% 

TME 1995, p. vi; RIVM 2000, p. 13, cited in Oosterhuis (2006, p.26)


& gradual improvements of already existing technologies (for which Krozer 

assumes that these will mainly lead to cost-savings and not so much to increased 

reduction potential); 

& innovations (or “leap technologies”) for technologies which are new and can 

compete with existing technologies in both efficiency (lower costs) and 

effectiveness (larger reduction potential). 

This distinction is important, especially concerning the development of the 

reduction potential, because this will enable in the future a greater reduction in 

pollution than currently thought. 

The anecdotal evidence on waste water treatment and low NOx technologies in 

industry actually shows both developments: 

& increasing reduction potential (to almost 100% theoretical) in a period of about 

30 years; 

& decreasing unit costs. 

So from the empirical point of view both developments are important enough to be 

separately considered when estimating future costs of environmental technologies. 

Because most environmental impacts are external to markets, for eco-innovation 

to occur it will need to be largely driven by public policy rather than by (free) 

markets. Aghion et al. (2009a) find that such policy is not yet anything like strong 

enough to generate the level of eco-innovation that is required to address major 

environmental problems such as climate change. It is to the nature and effectiveness 

of the required policies that this paper now turns. 

5 Policies for environmental innovation and eco-innovation 

While some resources have prices that are considered in market transactions, the 

great majority of environmental considerations do not enter into the cost calculations 

of markets, unless government policy causes this to happen through the various 

kinds of policy instrument. Jordan et al. (2003) categorised them as follows: 

& Market/incentive-based (also called economic) instruments (see EEA 2006, for a 

recent review of European experience). 

& Regulatory instruments, which seek to define legal standards in relation to 

technologies, environmental performance, pressures or outcomes (Kemp 1997 

has documented how such standards may bring about innovation). 

& Voluntary/self-regulation (also called negotiated) agreements between governments 

and producing organisations (see ten Brink 2002, for a comprehensive 

discussion). 

& Information/education-based instruments (the main example of which given by 

Jordan et al. (2003) is eco-labels, but there are others), which may be mandatory 

or voluntary. 

Broadly, the market-based and regulatory instruments may be thought of as ‘hard’ 

instruments, because they impose explicit obligations, whereas voluntary and 

information-based instruments may be thought of as ‘soft’ instruments, because

282 P. Ekins 

they rely more on or seek to stimulate discretionary activities. The distinction is not 

hard-edged, in that the provision of information may be obligatory (e.g. mandatory 

reporting standards) and voluntary agreements may have ‘hard’ sanctions in the 

event of non-compliance, so that it might be more accurate to think of these 

instruments as on a spectrum rather than in discrete categories. The ‘soft’ 

instruments also include public support for research and development (R&D), 

which is likely to be a particularly important instrument in relation to the stimulation 

of eco-innovation. In fact, Aghion et al. (2009a, b) say that the two crucial 

instruments for low-carbon innovation are a carbon tax and subsidies for low-carbon 

technologies (both market-based instruments), and public spending on R&D. 

It has been increasingly common in more recent times to seek to deploy these 

instruments in so-called ‘policy packages’ or ‘instrument mixes’ (OECD 2007), 

which combine them in order to enhance their overall effectiveness across the three 

(economic, social and environmental) dimensions of sustainable development. One 

of the main distinguishing characteristics of the eco-industries described in the 

previous section is that they came about through the prescriptions of public policy, 

and their growth is almost entirely driven by it. 

A literature review by Oosterhuis and ten Brink (2006) discusses what is known 

about the effects of different types of environmental policy on innovation, noting 

that the impact of environmental policy on innovations in environmental technology 

has been studied in various ways, both theoretically (often using models) and 

empirically. From their review, Oosterhuis and ten Brink (2006) find that the 

significance of environmental policies in driving eco-innovation is usually 

confirmed by empirical studies, but they conclude that there is no unanimity about 

the question as to what kinds of policy instruments are best suited to support the 

development and diffusion of environmental technology. However, they did feel able 

to make some general observations: 

■ Economic instruments (charges, taxes and tradable permits) are often seen as 

superior to direct regulation (‘command-and-control’), because they provide 

(if designed properly) an additional and lasting financial incentive to look for 

‘greener’ solutions. For example, Jaffe et al. (2002) conclude that marketbased 

instruments are more effective than command-and-control instruments 

in encouraging cost-effective adoption and diffusion of new technologies. 

Requate (2005), in a survey and discussion of recent developments on the 

incentives provided by environmental policy instruments for both adoption 

and development of advanced abatement technology, concludes that under 

competitive conditions market-based instruments usually perform better than 

command and control. Moreover, taxes may provide stronger long term 

incentives than tradable permits if the regulator is myopic. Johnstone (2005) 

also presents some arguments from the literature suggesting that taxes are 

more favourable to environmental innovations than tradable permits. 

■ Nevertheless, direct regulation was shown to work well in Germany when 

applying air emissions standards to power plants when the energy sector was 

still not liberalised and the energy companies had the possibility of passing 

through the costs. The context was important in having parties accept the 

required command and control. Evidence suggests that German emissions


reductions fell very quickly due to the instrument and context and faster than 

countries where economic instruments were used. This gives one counter 

example to the oft- quoted position that market-based instruments are more 

effective. Direct regulation may also be a powerful instrument in spurring 

eco-innovation (provided that the standards set are tight and challenging) 

because firms may have an interest in developing cleaner technology if they 

can expect that that technology will become the basis for a future standard 

(e.g. BAT), so that they can sell it on the market. 

■ Ashford (2005) arguesthata‘command-and-control’ type of environmental 

policy is needed to achieve the necessary improvements in eco- and energy 

efficiency. According to Ashford, the ‘ecological modernization’ approach, with 

its emphasis on cooperation and dialogue, is not sufficient. Economic instruments 

may also be less appropriate if the main factor blocking eco-innovation is 

not a financial one. For instance, simulations with the MEI Energy Model 

(Elzenga and Ros 2004), which also takes non-economic factors into account, 

suggest that voluntary agreements and regulations may be more effective than 

financial instruments (such as charges and subsidies) in stimulating the 

implementation of energy saving measures with a short payback period. 

■ Some authors, such as Anderson et al. (2001) stress that ‘standard’ 

environmental policy instruments are not sufficient to induce eco-innovation, 

and that direct support for such innovation is also needed. The main reasons for 

this are the positive externalities of innovation and the long time lag between 

the implementation of a standard policy and the market penetration of a new 

technology. 

■ The appropriateness of particular instruments (or instrument mixes) may 

depend on the purpose for which they are used (e.g. innovation or diffusion) 

and the specific context in which they are applied (see e.g. Kemp 2000). 

■ Finally, the design of an instrument may be at least as important as the 

instrument type. One type of instrument can produce widely different results 

when applied differently. For example, Birkenfeld et al. (2005) show remarkable 

differences in the development of trichloroethylene emissions in Sweden and 

Germany. Both countries used direct regulation, but in Sweden this was done by 

means of a ban with exemptions, whereas Germany opted for a ‘BAT’ approach. 

The latter proved to be much more effective in terms of emission reduction. 

A study commissioned by DG Environment of the European Commission 

investigated the innovation dynamics induced by environmental policy through five 

case studies. The study was reported in Oosterhuis 2006, and its results were 

summarised by Ekins and Venn (2009). The headline conclusions of the five case 

studies were: 

1. Automotive industry—Innovation levels differed greatly between the three 

countries studied. Japan had incentivised the most innovation, although there 

was little information about the development of its standards, the USA set 

standards unambitiously low, and Europe had induced ‘modest’ levels of 

innovation. In the European case other trends (i.e. dieselisation) had influenced 

the EU car manufacturing sector more.

284 P. Ekins 

2. Office appliances—Innovation levels as identified in Japan and the USA were 

high and directly correlated to the respective policies which were implemented, 

in both cases strict public procurement policies. In Japan these were combined 

with increasingly stringent standards. The European case study saw that there 

was an uneven use of energy efficiency criteria in member states’ public ICT 

tenders. This is coupled with the fact that the EU still tends to shy away from 

mandatory energy efficient public procurement despite industry support. 

3. Photovoltaics—This sector has undergone rapid, and innovative, development 

in recent years. Japan and Germany have both encouraged significant expansion 

and development of the sector through substantial financial incentives and R&D 

support. With far lower financial commitment, the UK has not managed to 

achieve substantial deployment of installed PV capacity. 

4. Pulp and paper—In Europe there has been innovation with respect to 

abatement technologies, but the extent to which this has been induced by 

policy is not clear. Insofar as an effect is discernible, it seems to be more due to 

the characteristics of the instrument (e.g. its stringency) than to the nature of the 

instrument itself. 

5. Hazardous chemicals—In general there has been success in encouraging 

innovation or diffusion of existing technology. Policy approaches in Sweden, 

Denmark and Germany have in different ways all been influential in 

encouraging innovation and reducing environmental impact. There is an 

interesting contrast between approaches that seek to reduce the use of hazardous 

substances (Sweden, Denmark) and those that seek to contain them (Germany). 

It is of note that Sweden and Denmark, the two EU countries applying the 

substitution principle, also have the highest rate of R&D in their respective 

chemical industries. 

Table 2 categorises the environmental policy instruments used, as revealed by the 

case studies, in terms of the typology above, and shows whether the type of 

innovation which seems to have been primarily induced was end-of-pipe, processintegrated 

or product innovation. It also provides an overall indication of the success 

of the policy in inducing eco-innovation. Table 2 shows that a wide range of 

different environmental policies has been used in different countries, ranging in 

Europe across voluntary approaches, directives, investments, grants, bans, taxes and 

technical standards. In the USA classic regulation, i.e. command-and-control, 

appears most common. 

Across the case studies there are a number of cross-cutting themes with policy 

implications. 

& Technological development—One assumes that most regulatory approaches 

seek to allow for technological development and increasing efficiencies over a 

time period. However, the technical expertise required to understand all factors at 

play in such sectors as the hazardous chemicals sector or the PV sector is 

formidable, and there are bound to be problems of asymmetric information 

between industry and the policy maker. 

& Commercial factors—The extent of innovation is often reflected in commercial 

learning curves and economies of scale associated with the production and 

development of new technologies and processes. These developments will rarely


Table 2 Comparison of innovation observed 

Policy type Innovation type experienced 

Policy result in 

inducing innovation 

Country or 

area 

Case 

study 

Product 

Innovation 

Process 

Integrated 

End of 

Pipe 

Voluntary Information 

Based 

Classic 

Regulation 

Incentive/Market- 

Based 

1 Europe Medium X X 

1 USA Poor X X 

1 Japan Good X X X X 

2 Europe Poor X a 

X 

2 USA Excellent X X X 

2 Japan Excellent X X X X 

3 Germany Good X X 

3 Japan Excellent X X X 

3 UK Poor X X X 

4 Various Unclear X X X 

5 Sweden Good X X 

5 Denmark Good X X 

5 USA Good X X 

5 Germany Excellent X X b 

a 

Although a Directive is used, and an obligation is present, other considerations supersede obligations making the approach voluntary. The option of mandatory public 

procurement is being discussed currently by the European Community Energy Star Board. 

b 

Although there has been product innovation, a main success of the policy has been the eco-innovation of new processes and capital stock together with a reduction in the use of 

hazardous chemicals.

286 P. Ekins 

be disclosed due to their sensitive commercial nature—making it hard for the 

policy maker to accurately predict potential rates of innovation, as they will 

rarely be party to such sensitive information. 

& Standards—It seems from analysis in case studies 1, 2 and 5 that setting 

standards for industry can work effectively. An incentivised approach, with 

technical standards and green procurement plans, allowed firms to approach the 

target flexibly and innovate to meet it. However, when standards are set low 

(such as in case study 1—USA) unsurprisingly there is little incentive to exceed 

the benchmark. 

& Focus—It is apparent that unless actions are targeted to specific areas and take 

into account external trends, as they were in Japan with the Top Runner 

Programme, policies will generally not aid in encouraging innovation. This was 

seen in the UK PV market where policies both failed to take account of external 

developments in the global market, and involved low levels of funding, resulting 

in insignificant levels of innovation or deployment. 

& Historical trends—There can be historical factors at play which present barriers 

to innovation in certain sectors or geographical locations. For example in the 

pulp and paper industry innovation is low due to the mature nature of the 

industry, and the fact that the median age of paper machines in Europe is 

23 years. In the USA the historical setting of low levels for fuel economy 

improvements in automobiles encouraged a poor performance in the sector. 

The headlines lessons learned from the case studies may be summarised as: 

& Inducing innovation requires strong policy. Weak policy, whether in terms of 

weak standards (e.g. 1—USA), or low levels of expenditure (3—UK) will not be 

likely to achieve it. 

& Classic regulation was the single most important type of policy in the case 

studies where eco-innovation was stimulated, sometimes combined with marketbased 

instruments (especially public purchasing or subsidies). However, an 

overall conclusion from the case studies was that ‘No general statements can be 

made about the kind of policy instruments that are best suited to support the 

development and diffusion of environmental technology.’ Oosterhuis (p.vi, 

2006). 

& Regarding learning curves and economies of scale, case studies 2, 3 and 5 all 

found that when policy, or external factors, encouraged innovation, positive 

relationships between increases in production and reduction in costs were found. 

The PV case study noted that it was not merely learning curves of PV which 

must be taken into account, but also learning curves of associated infrastructural 

technology. 

In terms of the categorisation introduced earlier, Table 2 shows that the great 

majority of the policy instruments used in the case studies were ‘hard’ (market-based 

or regulatory) rather than ‘soft’. In fact, with only one exception (and with a Poor 

result) the latter were really only employed as subsidiary instruments. In such a role, 

however, they still may help the policy to have a better overall result. 

It is also interesting to reflect on the case studies in terms of Fig. 4. In all cases, 

institutions are important to the implementation of any policy, whether ‘hard’ or


‘soft’. New instruments may require new institutions, or institutional change, but 

whether or not this is the case strong branding of the policy is likely to help its 

implementation and contribute to its effectiveness. The branding, however, will be 

crucially related to the political and cultural context, so that it is difficult to make 

generalisations across different countries, except to say that the context is likely to 

find most obvious expression through the ‘soft’ instruments that are deployed. 

6 Conclusions 

History shows that innovation is one of the normal characteristics of markets and 

capitalist economic development, and current innovation rates are, in historical 

terms, very high. However, normal innovation is driven by a desire for market 

success, which may have little to do with environmental impacts. In fact, normal 

innovation may increase or decrease environmental impacts. The environmental 

policy makers’ task is to seek to harness normal innovation forces in order to achieve 

win-win outcomes, i.e. environmental improvements as well as improvements in 

products and processes from a market point of view. Because innovation is 

inherently unpredictable, and there is no methodology that can reliably assess the 

‘without policy’ counterfactual, there is an inherent problem in assessing the results 

of policy in relation to eco-innovation. However, as shown above, careful case study 

comparisons can generate insights as to whether and how eco-innovation has been 

achieved. 

Just because policy can achieve eco-innovation does not mean that it will be easy 

to introduce. As this paper has made clear throughout, there is a political economy of 

eco-innovation as of any other subject that affects the distribution of resources. 

Aghion et al. (2009a) present worrying evidence that, despite recent rhetoric on 

green innovation, not only is this not the dominant direction of innovation, it is even 

lagging behind the rate of non-directed innovation. This situation will have to 

change if increasingly serious environmental problems are to be effectively 

addressed. 

The eco-industries, supported by public opinion, need to become crucial actors in 

the political economy of eco-innovation if such innovation is to become more 

widespread and transformational, leading to a profound eco-innovatory transition. 

Such a transition (like all transitions) will adversely affect many well established 

industries and interests and will be fiercely resisted by those interests. The ecoindustries 

need to become an increasingly effective counter-force to this resistance. 

Because eco-innovation will be largely driven by public policy rather than by 

(free) markets, established industries will do everything they can to prevent or slow 

the introduction of policies to promote eco-innovation (for example, the campaign 

by the US fossil fuel industries against the climate policies of President Obama, 

[Goldenberg 2009]). At the same time, for global environmental problems like 

climate change, there is little point in imposing policies on firms subject to global 

competition and industries that are mobile, such that they simply relocate without 

any overall change to global production or consumption or environmental impacts. 

Although there is very little evidence to date that such relocation has actually taken 

place, the possibility is resonant in the political rhetoric around environmental policy

288 P. Ekins 

and adds to the difficulty of driving eco-innovation in the contemporary global 

marketplace. 

Clearly national policies on eco-innovation need to be underpinned by international 

agreements that all countries will take action to reduce their environmental impacts. 

While such agreements now exist (perhaps most importantly the UN Framework 

Convention on Climate Change), there is a long way to go before they assert a sufficient 

influence on global market developments for eco-innovation to proceed at the pace 

identified at the beginning of this paper as scientifically necessary to avoid major 

disruption to natural systems and human societies. 

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DOI 10.1007/s10368-010-0163-y 


The Dutch energy transition approach 

René Kemp 


# The Author(s) 2010. This article is published with open access at Springerlink.com 

Abstract The article describes the Dutch energy transition approach as an example 

of an industrial policy approach for sustainable growth. It is a corporatist approach 

for innovation, enrolling business in processes of transitional change that should lead 

to a more sustainable energy system. A broad portfolio of options is being supported. 

A portfolio of options is generated in a bottom-up, forward looking manner in which 

special attention is given to system innovation. Both the technology portfolio and 

policies should develop with experience. The approach is forward-looking and 

adaptive. One might label it as guided evolution with variations being selected in a 

forward-manner by knowledgeable actors willing to invest in the selected 

innovations, the use of strategic learning projects (transition experiments) and the 

use of special programmes and instruments. Initially, the energy transition was a selfcontained 

process, largely separated from existing policies for energy savings and 

the development of sustainable energy sources. It is now one of the pillars of the 

overall government approach for climate change. It is a promising model but 

economic gains and environmental gains so far have been low. In this article I give a 

detailed description of the approach and an evaluation of it. 


The term transition is employed by various scholars and organisations working on 

sustainable development. The first book containing these terms was the book The 

Transition to Sustainability. The Politics of Agenda 21 in Europe, edited by Timothy 

O’Riordan and Heather Voisey, published in 1998. This book was followed by two 

other books which similar titles: Our Common Journey: A transition toward 

sustainability by The Board on Sustainable Development of the US National 

Acknowledgement The author wants to thank the reviewers and the editor for their comments. 

R. Kemp (*) 

UNU-MERIT, Maastricht, The Netherlands 

e-mail: r.kemp@maastrichtuniversity.nl 

R. Kemp 

ICIS, Maastricht, The Netherlands

292 R. Kemp 

Research Council (NRC 1999) and Sustainable development: The challenge of 

transition edited by Jurgen Schmandt and C.H. Ward (2000) contained contributions 

from Frances Cairncross, Herman Daly, Stephen Schneider which came out in 2000. 

In all three books the term transition is used as a general term, not as a theoretical 

organizer. 

In the last 8 years various articles appeared in which the term transition is explored 

and used in a more theoretical sense. The new literature consisted of historical studies 

looking back at past transitions using a multilevel perspective (Geels 2002, 2005, 2006, 

2007), theoretical deliberations about transitions (Geels 2002, 2004; Berkhout et al. 

2004; Smith et al. 2005; Geels and Schot 2007; Genus and Cowes 2008), and 

deliberations about steering societies towards more sustainable systems of provision 

and associated practices (Rotmans et al. 2001; Grin2006; Kemp and Loorbach 2006; 

Kemp et al. 2007a, b; Loorbach 2007; Shove and Walker 2007, 2008; Rotmans and 

Kemp 2008; Smith and Stirling 2008; Holtz et al. 2008; Foxon et al. 2009). People in 

this literature are concerned with transformative change (system innovation), drawing 

on a co-evolutionary perspective, with technology and society mutually shaping each 

other, instead of one more or less determining the other. 1 This article will do two 

things: a) it will describe transition thinking (Section 2) and b) it will describe attempts 

by the Dutch government to apply transition thinking in the area of energy (Section 3). 

A reflection and tentative evaluation of transition policy is offered in Section 4. 

2 Transition thinking in the Netherlands 

In this section we give an overview of transition research and thinking in the 

Netherlands. The Dutch “transition to sustainability” literature is concerned with 

fundamental changes in functional systems of provision and consumption. It involves 

contributions from innovation researchers, historians of technology, political scientists 

and systems analysts. It is not rooted in one discipline and people tend to be 

multidisciplinary (some are even transdisciplinary which means that they are working 

with practitioners). Basically there are four traditions: the work on sociotechnical 

transitions by Frank Geels and others, the work on transition management by Jan 

Rotmans and others, the work on social practices and systems of provision by Gert 

Spaargaren and others, and the work on reflexive modernisation by John Grin and 

others. People in those traditions are cooperating in the Dutch KSI programme on 

system innovation and transition. Each of the traditions will be briefly described. 

2.1 The sociotechnical approach 

The sociotechnical transition approach is created in Twente by Arip Rip and Johan 

Schot, and was used by historians in a big research programme about the history of 

technology in the Netherlands. It is based on a co-evolutionary view of technology 

and society and a multilevel perspective (Rip and Kemp 1998; Geels 2002, 2004; 

Hoogma et al. 2002). The co-evolutionary holds that technology and society 

1 Various contributions on the idea of co-evolution steering for sustainable development can be found in 

the special issue of The International Journal of Sustainable Development and World Ecology.

The Dutch energy transition approach 293 

codetermine each other and that the interactions give rise to irreversible developments 

and path dependencies. The multilevel perspective is an attempt to bring in 

structures and processes of structuring into the analysis through the use of the 

following three elements: the sociotechnical landscape, regimes, and niches. 

The socio-technical landscape relates to material and immaterial elements at the 

macro level: material infrastructure, political culture and coalitions, social values, 

worldviews and paradigms, the macro economy, demography and the natural 

environment. Within this landscape we have sociotechnical regimes and special niches. 

Sociotechnical regimes are at the heart of transition scheme. The term regime 

refers to the dominant practices, search heuristics, outlook or paradigm and ensuing 

logic of appropriateness pertaining in a domain (a sector, policy domain or science 

and technology domain), giving it stability and orientation, guiding decision-making. 

Regimes may face landscape pressure from social groups objecting to certain 

features (pollution, capacity problems and risks) and may be challenged by niche 

developments consisting of alternative technologies and product systems. Faced with 

these pressures, regime actors will typically opt for change that is non-disruptive 

from the industry point of view, which leads them to focus their attention to system 

improvement instead of system innovation. 

A visual representation of the multilevel model is given in Fig. 1. taken from Rip 

and Kemp (1996), indicating three important processes: 1) the creation of novelties 

at the microlevel against the backdrop of existing (well-developed) product regimes, 2) 

the evolution of the novelties, exercising counter influence on regimes and landscape, 3) 

the macro landscape which is gradually transformed as part of the process occurring 

over time (X-axis). 

The key point (basic hypothesis) of the multi-level perspective (MLP) is that 

transitions come about through the interplay between processes at different levels in 

different phases. 2 In the first phase, radical innovations emerge in niches, often outside 

or on the fringe of the existing regime. There are no stable rules (e.g. dominant design), 

and actors improvise, and engage in experiments to work out the best design and find 

out what users want. The networks that carry and support the innovation, are small and 

precarious. The innovations do not (yet) form a threat to the existing regime. In the 

second phase, the new innovation is used in small market niches, which provide 

resources for technical development and specialisation. The new technology develops a 

technical trajectory of its own and rules begin to stabilise (e.g. a dominant design). But 

the innovation still forms no major threat to the regime, because it is used in specialised 

market niches. New technologies may remain stuck in these niches for a long time 

(decades), when they face a mis-match with the existing regime and landscape. The third 

phase is characterised by wider breakthrough of the new technology and competition 

with established regime, followed by a stabilisation and new types of structuring. 

A transition example is the transition from coal to natural gas in the Netherlands 

for space heating. 3 Here multiple developments coincided; the discovery of large 

amounts of natural gas in the Netherlands at the end of the 1950s, experience with 

large-scale production and distribution of gas produced in coke factories, cheap 

imports of coal which made Dutch coal production unprofitable. Furthermore with 

2 This section comes from Geels and Kemp (2007). 

3 Based on Rotmans et al. (2000, 2001) who based themselves on Verbong (2000).

294 R. Kemp 

Fig. 1 The multilevel model of innovation and transformation. Source: Rip and Kemp (1996) 

the rise of nuclear power, there was also a general expectation that the price of 

energy was about to fall sharply. So when a large gas field was discovered in 

Slochteren in 1959, exploiting it became a political priority. 

Important meso factors were the creation of a state gas company, the Staatsgasbedrijf, 

for the distribution of gas, and a national gas company, the Nationale Gas Maatschappij, 

for the supply of gas. The creation of these companies was resented by local councils 

and the semi-nationalized companies (Hoogovens and Dutch State Mines—DSM) who 

did not want to give up their power. However, after tough negotiations of government 

with oil companies Shell and Esso (now Exxon), the gas supply became the monopoly 

of the Gasunie (Gas Association), whose shares were owned by the state and the two oil 

companies. Under the supervision of the Gasunie, local councils retained responsibility 

for distribution. Hoogovens was bought out and DSM was included in the Gasunie on 

behalf of the government as a compensation for the closing of the mines. 

Households were sold to the idea of using natural gas, thanks to campaigns. By 

international standards, the condition of the Netherlands’ housing stock was poor. 

Houses were uncomfortable, lacked insulation and were poorly heated, representing a 

(large-scale) socio-technical niche. People wanted the comforts of central heating and 

warm water for showers/baths. By the end of the 1960s, the transformation was 

complete: the gas supply was based fully on natural gas and controlled by the Gasunie. 

The transition from coal to natural gas in the Netherlands is an example of a 

government-induced (one could say managed) transition. The Dutch government had 

clear objectives and sub-objectives, which resulted in a very quick and relatively 

smooth transition. Such a goal-oriented transition is rather exceptional; most 

transitions are the outcome of the many choices of myopic actors who do not based 

their decisions on a clear long-term view. 

The transition scheme has been refined and used by Frank Geels and others in a series 

of studies. This work resulted in several theoretical innovations: the identification of 4 

transition patterns (transformation, de-alignment and re-alignment, technological 

substitution and reconfiguration) (Geels and Schot 2007) and the distinction between 

local and global elements in the development of new trajectories Geels and Raven 

(2007). More attention is also given to the interplay between multiple regimes


(Verbong and Geels 2007) and interplay of functions in the development of 

technological innovation systems (Jacobsson and Bergek 2004; Hekkert et al. 2007; 

Bergek et al. 2008; Markard and Truffer 2008). 

Most of the work is retrospective, based on secondary sources, but the multilevel 

perspective has also been applied prospectively, for example by Verbong and Geels 

(2008). The authors are all based in Eindhoven (in 2008 Frank Geels moved to 

SPRU in the UK). Much attention is given to technology aspects, because they are 

focussing their studies on transformations in which technology is a key element. 

Geels studied the following transitions: 

1. From sail to steamships UK (1840–1890) 

2. From horse-drawn carriage to automobiles US (1870–1930) 

3. From cesspools to sewer systems NL (1870–1930) 

4. From pumps to piped water systems NL (1870–1930) 

5. From traditional factories to mass production (1870–1930) 

6. From crooner music to rock ‘n’ roll US (1930–1970) 

7. From propeller-aircraft to jetliners US (1930–1970) 

8. Transformation of Dutch highway system (1950–2000) 

9. Ongoing transition in NL electricity system (1960–2004) 

This type of research builds on the work of Mumford (1934[1957]), Landes (1969), 

Rosenberg (1982) and Freeman and Louçã (2001). The above work may be usefully 

labelled the sociotechnical transition approach, given its focus on the co-evolution of 

technology, organisation and society. Technology is seen both as an outcome and a 

driver of transformations. 

2.2 The transition management approach 

The second type of scholarship is rooted in systems theory and complexity theory and is 

very much concerned with issues of steering and governance. This approach may be 

called either the societal transition approach or the transition management approach. 4 

It is being associated with people at DRIFT (especially Jan Rotmans and Derk 

Loorbach) in Rotterdam in the Netherlands, who have been active in the formulating 

principles of transition management. 5 I am part of both traditions, having worked with 

Frank Geels, Johan Schot and Arie Rip, and with Jan Rotmans and Derk Loorbach. 

In the first study on transition and transition management (Rotmans et al. 2000), a 

transition is being defined as a gradual, continuous process of change where the 

structural character of a society (or a complex sub-system of society) is being 

transformed (Rotmans et al. 2000). Transitions are transformations processes that lead 

to a new regime with the new regime constituting the basis for further development. A 

transition is thus not the end of history but denotes a change in dynamic equilibrium. 

A transition is conceptualised as being the result of developments in different domains 

and the process of change is typically non-linear; slow change is followed by rapid 

change when concurrent developments reinforce each other, which again is followed 

4 It may be called the societal transition approach because it has a stronger focus on (societal) actors and 

political conflict as primary drivers of transformations. 

5 DRIFT stands for the Dutch Research Institute for Transitions.

296 R. Kemp 

by slow change in the stabilisation stage. There are multiple shapes a transition can 

take but the common shape is that of a sigmoid curve such as that of a logistic 

(Rotmans et al. 2000, 2001). 

The multilevel, multi-phase model of transition was developed in a project for the 

4th National Environmental Policy Plan of the Netherlands. In the project called 

Transitions and Transition management, principles for transition management were 

developed by Jan Rotmans, René Kemp and Marjolein van Asselt, together with 

policy makers, which were. 

& Long-term thinking as a framework of consideration for the short-term policy 

(at least 25 years). 

& Thinking in terms of more than one domain (multi-domain) and different actors 

(multi-actor) at different scale levels (multi-level). 

& A focus on learning and a special learning philosophy (learning-by-doing and 

doing-by-learning). 

& Trying to bring about system innovation besides system improvement. 

& Keeping open a large number of options (wide playing field). 

(Rotmans et al. 2000, 2001) 

Transition management is based on a story line that persistent problems require 

fundamental changes in social subsystems, which are best worked at in forwardlooking, 

yet adaptive manner, based on multiple visions. Transition management 

consists of a deliberate attempt to work towards a transition offering sustainability 

benefits, in a forward-looking, yet adaptive manner, using strategic visions and 

actions. The concept is situated between two different views of governance: the 

incremental ‘learning by doing’ approach and the blueprint planning approach. 

Governance aspects were worked out in later years in a number of publications 

(Dirven et al. 2002; Rotmans 2005; Kemp et al. 2007a, b; and Loorbach 2007). The 

various elements of transition management are combined into a model of multi-level 

governance by Loorbach (2007) which consists of three interrelated levels: 

& Strategic level: visioning, strategic discussions, long-term goal formulation. 

& Tactical level: processes of agenda-building, negotiating, networking, coalition 

building. 

& Operational level: processes of experimenting, implementation. 

Transition management tries to improve the interaction between different levels of 

government by orienting these more to system changes to meet long-term policy goals. 

It is about organizing a sophisticated process whereby the different elements of the 

transition management process co-evolve: the joint problem perception, vision, agenda, 

instruments, experiments and monitoring through a process of social learning (Loorbach 

2007). Transition management should lead to different actor-system dynamics, with 

altered actor configurations, power-constellations and institutional arrangements that 

form a different selection environment wherein social innovations can mature more 

easily (Loorbach 2007). 

The basic steering philosophy is that of goal-oriented modulation, not planningand-control. 

Transition management joins in with ongoing dynamics and builds on 

bottom-up initiatives. Different sustainability visions and pathways towards 

achieving them are being explored. Over time, the transition visions are to be


adjusted as a result of what has been learned by the players in the various transition 

experiments. Based on a process of variation and selection new and better visions are 

expected to emerge, while others die out. 

It is important to note that in the transition scheme, government and government 

is seen as part of transitions or transformations instead of an external force. Policy is 

influenced by the interests, values, beliefs and mental models within the societal 

systems it seeks to alter and by the values and beliefs of society at large. The new 

role of government is to act as a facilitator of transformative change, something it 

can do on the basis of powers granted to them. 

2.3 The social practices approach 

The third tradition is that of social practices. Following Giddens, social practices are 

taken as the central unit of analysis. The concept of social practice refers to “a 

routinized type of behaviour which consists of several elements, interconnected to 

one another: forms of bodily activities, forms of mental activities, ‘things’ and their 

use, a background knowledge in the form of understanding, know-how, states of 

emotion and motivational knowledge” (Reckwitz 2002, p. 249). A distinction is 

made between integrated practices such as cooking, work and vacation and diffuse 

practices, being relatively simple standardised practices such as shaking hands or 

steering a car. Integrated practices are being undertaken in socially and materially 

situated contexts the characteristics of which shape (but do no determine) these 

practices, which have an individual and social element. 

The social practices approach has been developed into a transition approach by 

Spaargaren et al. (2007) using the notions of niche, regime and landscape. It analyses 

how transition processes take shape at the level of everyday-life, focussing on the 

connection points between consumers and providers (consumption junctions). One 

such connection point is the supermarket where people may find biological food in 

special corners, shelves, which may be part of a particular line of food products such 

as “pure and honest” products and who may or may not be singled out for attention 

by providers. Transitions refer to changes in regimes of housing, mobility, clothing 

and professional care. More than the other transition approaches attention is given to 

social and symbolic dimensions and the situational context of behaviour and 

decision making. Researchers in this tradition (for example Shove 2004; Spaargaren 

2003) are interested in de-routinisation and re-routinisation of everyday practice. 

2.4 The reflexive modernisation approach 

The fourth tradition is that of reflexive modernisation. This tradition uses the term 

system innovation instead of the term transition. The focus of this work is on the 

governance aspects around transformative change, the values, strategies and beliefs 

of societal actors. Sustainable development is viewed as a project of reflexive 

modernisation. Researchers in this tradition are especially interested in normative 

disputes, processes of re-structuration and issues of legitimacy and power (See Grin 

2006; Hendriks 2008). Meadowcroft, Shove, Walker, Bulkely, Smith, Stirling and 

Voss can be viewed as international representatives of this approach by emphasizing 

the importance of power, legitimacy and conflict.

298 R. Kemp 

What these four traditions unite is: 

& An interest in understanding the mechanisms and politics of transformative 

change offering sustainability benefits 

& A co-evolutionary view on societal transitions, in which different evolutionary 

(evolving) systems are influencing each other. 

There are differences in focus. Some researchers are more interested in 

understanding change than in how transitions may be managed (Geels), others are 

more interested in evaluating policy and governance arrangements (Hendriks, Kern, 

Howlett, Smith), and there are those who are primarily interested in offering 

guidance for the management of system change processes (Rotmans and Loorbach). 

The scholars share a view that transitions defy control because they are the result 

of endogenous and exogenous developments in regimes and the macro-landscape: 

there are cross-over effects and autonomous developments. Technical change 

interacts with economic change (changes in cost and demand conditions), social 

change and cultural change, which means that in managing transitions one should 

look for virtuous cycles of reinforcement (positive feedback). 

The term transition management is only used by people from the transition 

management school, where it is variously labelled as goal-oriented modulation, 

directed incrementalism, co-evolutionary steering and reflexive governance for 

sustainable development (Rammel and van den Bergh 2003; Kemp and Loorbach 

2006; Kemp et al. 2007a). It is a form of multilevel governance that is concerned 

with the co-evolution of technology and society in specific domains. 

In the Netherlands the national government is using transition thinking in its 

innovation policies. The transition approach is one of the pillars of the programme 

“Clean and Resource-Efficient” (In Dutch: Schoon en zuinig). In so doing they are 

using ideas from transition management. The next section will describe the Dutch 

transition approach for sustainable energy. 

3 The Dutch transition approach 

Concerns about the depletion of fossil fuels, dependencies on foreign suppliers, and 

climate change led policy makers in the Netherlands to gradually adopt a transition 

approach for sustainable energy, mobility, agriculture and resource use, which is 

novel and very interesting. It is interesting because of its focus on transformative 

change, its reliance on bottom-up processes and enrolment of business and other 

non-state actors in the transformation process. 6 

6 First ideas about transition management were created in the project “Transitions and transition 

management” for the fourth National Environmental Policy Plan (NMP4). In this project, a group of 

scientists and policy makers met to discuss a new strategic framework. A description of the coproduction 

process can be found in Kemp and Rotmans (2009) and Smith and Kern (2009). After the project the TM 

model was further developed by Derk Loorbach and Jan Rotmans and more or less independently by the 

Ministry of Economic Affairs (a description and discussion of this is given by Loorbach 2007).


The transition approach relies on guided processes of variation and selection. 

It makes use of “bottom-up” developments and long-term thinking. A set of 31 

transition paths are being traversed (including biomass for electricity, clean 

fossil, micro cogeneration, energy-producing agricultural greenhouses). The 

government acts as a process manager, dealing with issues of collective 

orientation and interdepartmental coordination. It also takes on a responsibility 

for the undertaking of strategic experiments and programmes for system 

innovation. Control policies are part of the transition approach but the 

government does not seek to control the process—it is not directing the process 

but seeks to facilitate learning and change. 

At the heart of the energy transition project are the activities of 7 transition 

platforms. In these platforms individuals from the private and the public sector, 

academia and civil society come together to develop a common ambition for 

particular areas, develop pathways and suggest transition experiments. 

The 7 platforms are: 

& New gas 

& Green resources 

& Chain efficiency 

& Sustainable electricity supply 

& Sustainable mobility 

& Built environment 

& Energy-producing greenhouse 

The transition approach officially started in 2002 with the project implementation 

transition management (PIT) of the Ministry of Economic Affairs |(EZ). In 2004– 

2005, the energy transition process gained speed through the establishment of 4 

platforms (new gas, green resources, chain efficiency and sustainable mobility), and 

the creation of the Interdepartmental Project directorate Energy transition (IPE). In 

2006 two additional platforms were established (sustainable electricity supply and 

built environment). The transition path energy producing greenhouse became a 

platform of its own in 2008. 

In the Interdepartmental Project directorate Energy transition (IPE) created in 

2005, issues of policy coordination are being discussed and dealt with by the 

secretary generals of six ministries: EZ responsible for innovation policy, energy 

policy and economic policy, VROM responsible for the environment, V&W 

responsible for mobility, LNV responsible for agriculture, fisheries and nature 

development, BuZA responsible for foreign development aid and biodiversity and 

the Finance Ministry. 7 

Based on suggestions from the transition platforms a transition action plan has 

been formulated which contains the following goals: 

➢ −50% CO2 in 2050 in a growing economy 

➢ An increase in the rate of energy saving to 1.5–2% a year 

7 EZ is the Ministry of Economic Affairs, VROM is the Ministry of Health, Spatial Planning and 

Environment, V&W is the Ministry of Traffic and Water, LNV the Ministry of Agriculture and Nature, 

BUZA the Ministry of Foreign Affairs)

300 R. Kemp 

➢ The energy system getting progressively more sustainable 

➢ The creation of new business 8 

The transition action plan was prepared by the Taskforce energy transition, based 

on inputs form the platforms. With the action plan entitled “More with energy. 

Chances for the Netherlands” the Dutch energy transition approach went ‘public’. In 

May 2006, in a television news-broadcasted event, it was presented by the chair 

person (Rein Willems, CEO of Shell Netherlands) to the Dutch public and political 

parties. It is a highly corporatist approach, which has been criticized on democratic 

grounds (Hendriks 2008). Interestingly, however it was government who enrolled 

business in it, and not the other way. It took a lot of persuasion of the Ministry of 

Economic Affairs to have business involved. It was EZ who took the initiative to 

create a platform by appointing a chair, whose task was to invite innovative business 

people to the platform, together with experts and people from civil society. In each 

platform there is someone from government serving as a “linking pin” with policy. 

Each platform has 10 to 15 members. They are selected by the chair on the basis of 

personal knowledge of, and visions related to, the theme in question; they are not 

invited as representatives of particular interests (Dietz et al. 2008, p. 223). Some of 

the platform members will chair temporary working groups comprising an ad hoc 

selection of experts, entrepreneurs and NGOs, which prepare or define solution 

directions or strategic processes for the platform theme. In this way, in each platform 

some 60 to 80 ‘leaders’ are involved (Dietz et al. 2008, p. 223). 

The task force only existed for less than 2 years, in which it produced two reports; 

the transition action plan (May 2006) and a set of recommendations (Dec 2006). It 

was superseded by the Regieorgaan Energietransitie Nederland (REN) created in 

2008. The Regieorgaan is responsible for developing an overall vision for the energy 

supply (electricity and heat) in the Netherlands and to formulate a strategic agenda 

based on inputs of the platforms. 9 In 2009 they will produce recommendations for 

policy, as part of an official advice, solicited by the Dutch government. The 

Regieorgaan is composed of 11 people: the chairs of the 7 transition platforms and 4 

“independent members”. 

The transition platforms selected 31 transition paths. An overview of these is 

given in Appendix I, together with the self-stated goals and transition experiments. 

8 

In 2009 the official goals for 2020 are: 2% rate of energy saving a year, 20% share for renewable energy 

and 30 reduction of CO2. 

9 

The formal tasks of the Regieorgaan are: 1) to create a basis for support among public and private parties 

for the energy transition to stimulate the design, formulation and implementation of transition paths, 2) to 

actively stimulate the bundling of ambitions, ideas about possibilities, knowledge and experience of 

business, 3) to stimulate cohesion between the different activities of the energy transition and to guard and 

monitor progress, 4) to promote long-term planning for the energy transition and the development and 

implementation of transition paths, 5) to make recommendations to Ministers about the energy transition 

and the implementation of transition paths on the basis of monitoring, analysis and evaluations, 6) to 

identify, select and stimulate new developments, initiatives and innovations relevant to the energy 

transition, based on ambitions and competences of market actors and government energy transition goals, 

7) to make recommendations to Ministers for what they can do in terms of policy interventions for the 

energy transition, 8) to evaluate the transition paths every 4 years, to actualize them and to make 

recommendations for an actualization of long-term plans, 8) to create a network of public and private 

partners for the promotion of clear communication between the parties of the energy transition and 

between the transition paths, 9) to promote information provision for the general public about the energy 

transition.


The portfolio of transition paths contains technological innovation at different states 

of development. The Platforms Sustainable Mobility, Built Environment, and Chain 

Efficiency concentrate themselves on the accelerated introduction of available 

technologies; the other platforms oriented themselves more towards emerging 

technologies (such as 2nd generation biofuels). 

In the 2004–2007 period 160.2 million euro has been spend on the transition 

experiments and demonstration projects in the area of sustainable energy through the 

UKR and EOS-DEMO schemes. An overview of the expenditures over the 7 

platforms can be found in Tables 1 and 2. 

In order to qualify for support under the UKR the experiments should 

– be part of an official transition path 

– involve stakeholders (beyond business) in an important way 

– have explicit learning goals for each of the actors of the consortium. 

In the period Oct 2007–Dec 2008 86 projects have been funded through various 

programmes. Total investments for these projects amounted to 191 million euro. The 

government contribution for these programmes was 56 million euro. The projects 

cover a wide range of transition paths, and not just a few (Table 3). 

The production of sustainable energy is supported through the SDE (Stimulering 

Duurzame Energieproductie) instrument. For 2009 the total budget amounts to 2.585 

million euro (this sum does not include support for offshore windpower). http:// 

www.senternovem.nl/sde/algemene_subsidie_informatie/index.asp 

The transition approach goes beyond technology support. It is oriented at creation 

capabilities, networks and institutions for transitional change through the creation of 

agendas, partnerships, new instruments, and vertical and policy coordination are part 

of it. The IPE plays an important role in “taking initiatives”, “connecting and 

strengthening initiatives”, “evaluate existing policy and to act upon the policy advice 

from the Regieorgaan and transition platforms”, to “stimulate interdepartmental 

coordination” and to “make the overall transition approach more coherent” 

Table 1 Overview of transition experiment projects in the area of sustainable energy funded by the 

unique opportunities scheme (UKR) in the 2004–2007 period 

Unique opportunities scheme(UKR) 

Platform Projects 

approved 

Investment amount × 

1 million euro 

Subsidy amount × 


CO2reduction 

in kton/year 

New gas 22 316.7 45.7 1,647 

Sustainable electricity supply 2 9.1 2.0 2 

Transport (sustainable mobility) 10 150.1 10.8 1,053 

Green raw materials 5 100.4 12.5 39 

Greenhouse as energy source 1 111.0 4.0 90 

Chain efficiency 7 260.2 42.1 377 

Built environment 1 10.1 1.2 1 

Total 48 957.8 118.3 3,211 

Energy Innovation Agenda (2008, p. 112)

302 R. Kemp 

Table 2 Overview of demonstration projects in the area of sustainable energy funded under the EOS- 

DEMO programme in the 2004–2007 period 

Unique opportunities scheme(UKR) 

Platform Projects 

approved 

Investment amount × 


Subsidy amount × 


CO 2reduction 

in kton/year 

Projects 

approved 

New gas 49 125.5 18.3 74 9,234 

Sustainable 

electricity supply 

9 26.5 4.0 2 855 

Transport 

(sustainable mobility) 

4 9.3 1.1 4 618 

Green raw materials 4 6.3 1.5 4 289 

Greenhouse as 

energy source 

14 61.6 7.6 142 8,485 

Chain efficiency 16 50.1 9.4 46 2,793 

Built environment – – – – – 

Total 96 279.3 41.9 273 22,274 

Energy Innovation Agenda (2008, p. 113) 

(Staatscourant 25 Feb 2008, nr. 39, p. 29). The position of the energy transition 

approach within the policy framework for sustainable energy is given in Fig. 2. 

As one can see the energy transition approach is but one element in the policy 

framework for sustainable energy, which is much wider and includes production 

subsidies, environmental covenants and green procurement policies at the demand 

side, various RTD policies and other policies at the supply side, policies for start ups, 

cluster policies and other sociotechnical alignment policies. 

The whole approach is set up as a vehicle for sociotechnical change and policy 

change in a coordinated manner. This is evident from the following quote from 

policy makers Frank Dietz, Hugo Brouwer and Rob Weterings: 

“It is clear that working on fundamental changes to the energy system can only be 

successful if the government adjusts its policy instrumentarium accordingly. This 

means that the policy for research and development, the stimulation of 

demonstration projects, and the (large-scale) market introduction must be brought 

in line with the selected transition pathways. In addition, the suggestions for new 

policies put forward by the platforms must be taken seriously. At this point, the 

government faces a major challenge, because much of the current policy was 

formulated based on the classic way of thinking that is characterized by a topdown 

approach and dominated by short-term objectives, implemented by 

fragmented and individually-operating departments and Ministries, on which 

market influences do not or hardly have any effect” (Dietz et al. 2008: 238) 

It is also evident from the activities of the Regieorgaan and the platforms for 2009 

(Table 4). 

As one can see the platforms seek to produce advice, take stock of what has been 

achieved, they commission studies and are involved in all kind institutional 

alignment activities (also between the platforms). The platforms are currently


Table 3 Government policy instruments for innovative transition projects 

Government instrument 

providing support to 

innovative transition 

projects 2007–2008 

working with municipal authorities and national government to create pilots for 

energy neutral living districts to learn about alternative energy systems (with the 

systems going beyond particular technologies from the platforms) and to create 

visibility for the energy transition. 

3.1 Front-runners desk 

An interesting initiative is the front-runners desk, created in 2004, designed to help 

innovative companies with problems encountered and to help policy to become more 

innovation friendly. Problems varied from difficulties with getting financial support 

(from government or private finance) to problems with getting permits. Between Jan 

2004 and March 2006, 69 companies approached the desk to discuss problems. In 59% 

of the cases, the problems were solved thanks to the intervention of the desk, in 12% of 

the cases the companies could not be helped, and in the remaining cases (29%) the desk 

was still dealing with the issue at the time of the evaluation. An overview of the 

functions of the desk for innovators and policy is provided in the Table 5. 

The government also funded an evaluation of 31 transition paths, to examine 

transition path specific “motors” and barriers. 

3.1.1 Budget and staffing 

Period Number 

of projects 

funded 

Number 

of project 

applications 

Subsidies 

(€) 

Total 

investments 

(indicative) 

Demonstration demo 1× Oct 07–Jan08 21 66 11,248,588 96,000,000 

Towards energy-neutral 

homes UKR 

1× Feb–Apr 08 15 42 7,500,000 30,300,000 

Clean busses 1× Nov 07–May 08 6 9 10,000,000 20,000,000 

Fuelling stations 

alternative fuels 

1× May–Jun 08 pm 44 1,800,000 5,000,000 

Semi-closed greenhouse/ 1× Feb–Mar 08 17 20 13,206,145 40,000,000 

other energy systems 

MEI 

(indicative) 

Heating/cooling in 

industry SBIR 

1× Sep–Dec 08 8 14 371.623 

Heating/cooling UKP 1× Sep–Dec 08 Unknown yet pm 10,000,000 pm 

Bio-innovative 

products SBIR 

1× Aug–Oct 08 20 47 1,800,000 nvt 

Total 8× 86 242 (3,0× more) 55,926,356 191,300,000 

(3,3× more) 

IPE werkplan 2008, pp. 6–7 

From the 6 Ministries involved (Ministry of Economic Affairs, Ministry of Health, 

Spatial Planning and Natural Environment, Ministry of Traffic and Water, Ministry 

of Agriculture and nature, Ministry of Foreign Affairs, Ministry of Finance) more 

than 20 people are directly involved in the energy transition activities. In the 

government period 2007–2008 in total 130 innovative projects started with a total

304 R. Kemp 

Fig. 2 Position of the energy transition approach within the Dutch policy framework for sustainable 

energy. Source: Author 

investment sum of 800 million Euro. For the 2008–2012 period 438 million euro has 

been allocated for energy innovation research. In total the following sums of money 

have been allocated for cleaner energy and energy saving: 1,747 million euro in 

2009, 1.898 million euro in 2010 and 1.898 million euro in 2011. 

The Dutch energy transition approach covers the entire energy supply system 

(including clean coal) with the exception of nuclear energy. The energy innovation 

agenda formulated in 2008 is oriented towards the 7 themes of the energy transition. 

For each theme, the government has formulated specific activities. 

For sustainable mobility the following activities are announced for the government 

period: 

1. The creation of a programme to create the basic infrastructure for natural 

gas and green fuels (liquid and gaseous) for vehicles. A subsidy scheme 

for filling stations for alternative fuels will be created. The 2 nd generation 

of biofuels is prioritised for sustainable development reasons including a 

higher CO2 reduction effect. Together with market parties a new programme 

for pilots will be set up for innovative, sustainable drive systems and the use of 

biofuels in busses and trucks, plus the use of additives for fuel reduction and 

reduction of fine particles. Foreign experiences will be studied and lessons will 

be used. 

2. The government will act as a launching customer for the use of innovative and 

sustainable vehicles and fuels. City distribution will be stimulated too.


Table 4 Planned activities in 2009 

Platform Planned activities in 2009 

Regieorgaan Production of an official advice on policy, in which they make 

recommendation for instrument choices 

Green resources To follow the implementation of sustainability criteria for biomass 

Position paper on CO2 allowances for biomass 

To launch an explorative study into the macroeconomic effects of biomass 

production and use in the Netherlands 

To develop a systematique for measuring green resources 

Sustainable mobility To make recommendations for fiscal treatment of clean vehicles 

To discuss the action plan on alternative mobility with leasing companies 

To examine how natural gas and green gas may pave the way for hydrogen 

Evaluate experiences with buss experiments funded in the first tender 

To offer advice on how public transport concessions may be used for innovation 

To assist in the implementation of 5 pilots about smart grids and electric mobility 

To launch or stimulate pilots for sustainable biofuels (high blends and biogas) 

and hydrogen in five cities in cooperation with Germany and Flanders in 

Belgium 

New gas To investigate product-market-combinations for decentralised gas use 

To commission or undertake a study into the potential of gas motors and 

absorption heat pumps 

Chain efficiency Starting the first phase of the programme for precision agriculture 

Sustainable electricity 

production 

Working out a development plan for process intensification 

Formulate platform positions on off shore energy, 

rules for co-burning of biomass, cogeneration, and conditions for coal-fired plants 

Implementation the earlier formulated action plan Decentralised infrastructure 

(smart nets) 

To examine and utilise opportunities in blue energy 

Built environment Platform advice about the restructuring of existing business parcs 

Bloemlezing energietransitie, November 2008 

Workplan (script) for achieving energy saving using a district-based approach 

Investigation of how local authorities may be involved, on a voluntary and 

less voluntary basis 

3. The government will continue the innovation programme for clean busses. A 2 nd 

tender will be implemented. A programme for “trucks of the future” will be 

created geared towards the demonstration of very clean and silent trucks for city 

distribution. 

4. In line with the EU Joint technology Initiative Fuel Cell and Hydrogen, large scale 

experiments will be undertaken in cooperation with EU partners. One possibility 

which is being considered is the creation of a corridor between the Randstad (west 

region of the Netherlands in which the 4 largest cities are located), Nordrhein- 

Westfalen (Germany) and Flanders (Belgium). In co-operation with local 

authorities and industrial partners a demonstration programme will be prepared. 

The hydrogen will be produced in a climate-neutral way in Rotterdam for use in the 

Amsterdam bus and shipping initiative.

306 R. Kemp 

Table 5 Overview of functions of front runner desk for innovators and policy 

Functions for innovators Functions for policy 

Obtain financial support from existing instruments To make existing instruments more conducive 

for innovation 

To get into contact with relevant agencies and 

government people 

Overcoming legal problems and problems with 

permits 

To widen their network and strengthen the 

organisational set up of the innovation trajectory 

Business support and public relation help for the 

successful market introduction 

Weterings (2006) 

To improve policy coordination between ministries 

and within ministries 

To stimulate case-sensitive implementation of 

existing and new policy 

To stimulate policy development in areas of the 

innovation chain not well covered by policy 

To be serviceable to business in a case-sensitive way 

5. The government will stimulate the creation of standards for intelligent transport 

systems (ITS). Special attention is given to electronic systems for mobility 

payment which will become the basis for future payment and funding of 

infrastructure. The government will investigate the consequences of an increased 

use of plug-in hybrids and other electric vehicles for the electricity grid and will 

execute a large-scale test at the level of a neighbourhood district. 

6. The government will take steps towards a consistent and continuing fiscal 

support for sustainable vehicles and for transparent information supply about 

such vehicles for consumers. The national government will support the leasing 

market for sustainable vehicles. 

7. The national government will work with Airport Schiphol for making Schiphol 

more sustainable. 

Source: Innovatieagenda Energie (2008, pp. 40–41) 

Technological and organisational capabilities are being created endogenously, 

alongside strategic knowledge and aligned policies. Alignment between sociotechnical 

developments and policy is being achieved in various ways: through the 

(programming) activities of transition platforms and taskforces, a frontrunners desk, 

specially commissioned research into the development of transition paths, the 

transitions knowledge centre (KCT), the competence centre for transitions (CCT), 

and transition experiments. 

There are also regular interactions between transition researchers, practitioners 

and government. The government funded a 10 million social research programme on 

transitions. Researchers meet with practitioners at special network days and are 

involved in the government-funded innovation programmes for sustainable energy 

mobility, buildings, agriculture and health care. The author of this article was 

involved in a workshop with project managers of the Transumo programme, a 30 

million programme for sustainable mobility involving 150 organisations. In the 

workshop project managers were asked to reflect on the following questions: 

& Does the project offer a contribution to a societal problem (challenge)? Which 

challenge is this?


& Is it informed by a vision of sustainable mobility? Is it designed to learn about this 

vision? 

& Is it part of a transition path? If so, what path? 

& Is it oriented towards demonstration or learning? Does it learn about 

sustainability aspects, markets, how various actors may be enrolled and how 

the project may be scaled up? 

These questions helped them to reflect on their project in a novel way. 

3.1.2 Policy integration and cooperation 

The energy transition is something for all domains and layers of government. It 

involved various ministries and many different dossiers. For example, in the area of 

sustainable mobility a task force for mobility management has been set up to think 

about ways to reduce congestion not through road pricing but through flexible 

working times, teleworking, promoting the use of bicycles and public transport for 

commuting, which are being supported by business and workers. IPE is engaged in 

coordination activities for offshore wind power: allocation of spots, safety, financing 

of power cables. On this topic they have some influence, on other topics such as 

environmental regulations and fiscal measures it does not have great influence. 

It is also wrong to think that the platform’s choices are fully limitative for innovation. 

The official paths have an advantage but they do not foreclose other paths. New 

initiatives may emerge outside the platforms through parliament or because 

certain powerful parties in society are able to secure policy support for it. An 

example is the programme for battery electric vehicles which was defined by 

others. A coalition of NGOs, business (Essent, Better Place), finance (ING, Rabo) and 

the Urgenda (a coalition for sustainability action) successfully lobbied Ministers and 

parliament to give special support to BEVs. The platform for sustainable mobility was 

critical about the programme, it considered the hybrid-route more promising given the 

present state of development of batteries and thought that the goal of 1 million battery 

electric cars in 2025 was unrealistic but is working constructively with this initiative. 

On the whole policy coordination has improved in the last 6 years. For example, 

battery electric vehicles, hybrid electric vehicles and low-emission other vehicles are 

subject to special fiscal treatment. 10 There is more co-operation between Ministries 

and between government, business, research and civil society. There is also more 

co-operation of national initiatives and regional initiatives. 

The platforms are also working together more than before. For example, the platform 

for sustainable electricity supply (working group decentralised infrastructure) is 

investigating issue of charging stations for (plug-in hybrid) electric vehicles: technical 

standards for vehicle charge points, the capacity implications of a big fleet of (plug-in 

hybrid) for the electricity systems with different technical configurations, how to avoid 

10 In the Netherlands many vehicles are leased from companies. People driving a leased vehicle must add 

25% of the value of the car to their income before taxes and pay taxes over this extra sum. If you lease a 

battery electric vehicle, 10% of the value of the car is subjective to income taxes; for hybrid electric 

vehicles it is 14%. Charging points are up for a fiscal advantage of 20%. The tax incentives for cars 

proved very effective: in the first 5 months of 2009, 7456 hybrid electric cars were sold in the Netherlands, 

an increase of 63% compared to the same period in 2008. Between 2008 and 2009 the number of HEV 

doubled: from 11,000 to 23,000.

308 R. Kemp 

peak loads through load management. For now they are focussing on grid-to-vehicle 

and not on the reverse issue of vehicle-to-grid. All this is done as part of a four-year 

action plan 

To foster the “flexible use of instruments” for fostering energy innovation a 

special arrangement is created, the temporary energy arrangement market and energy 

innovation (Tijdelijke Energie Regeling Markt en Innovatie). IPE encouraged the 

development of it and was instrumental in aligning it with the innovation agenda for 

energy (Werkplan 2009 of IPE). These instruments complement the European 

Emissions Trading System for carbon emissions and the sectoral covenants for 

energy use reduction. Control policies are not part of the transition approach as such, 

in the future they might become part of it but they are now outside it. 

The transition approach for system innovation is a long-term approach for achieving 

carbon reductions which complements short-term policies for obtaining carbon 

reductions through the use of available energy saving options and carbon-low 

technologies. For achieving carbon reductions of 96 Mton by 2020 a “three waves” 

approach is used. The first wave consists of the picking of low-hanging fruit (low-cost 

carbon reduction options). The second wave consists of options that are almost mature, 

the third wave of options that require a great deal of R&D and experimentation. 

Examples of third wave options are CO2 capture and storage and the use of biological 

raw materials in the chemical industry (biorefining) (Energy Innovation Agenda 2008, 

p. 22). The three waves approach is given in Fig. 3. 

Anticipated carbon reductions from the (3 waves) Clean and Efficient programme 

are given in Table 6. 

4 Reflection and tentative evaluation 

In the Netherlands the national government is using a “transition approach” for 

making the transition to sustainable energy, drawing on ideas about transition 

Fig. 3 The 3 waves approach for achieving carbon reductions. Source: Energy Innovation Agenda 

(2008, p. 22)


Table 6 Anticipated carbon reductions from the Clean and Efficient programme 

in Mton/year 1990 2005 2010 2020 With clean and 

Unchanged 

policy 

Unchanged 

policy 

efficient according 

to ECN/MNP 

With clean and 

efficient cabinet 

goals, 

Built 30 39 27 26 20–23 15–20 6–11 

Industry/ 

electricity 

93 101 105 131 75 70–75 56–61 

Traffic 30 39 40 47 30–34 30–34 13–17 

Agriculture 9 7 9 7 5–6 5–6 1–2 

Other greenhouse 

gases 

54 36 35 35 28–29 25–27 8–10 

Total 215 212 215 246 158–167 150 96 

CDM/JI −15 

Energy Innovation Agenda (2008, p. 20), based on calculations by ECN/MNP 

Cabinet’s reduction 

goal compared to 

unchanged policy 

management articulated by Dutch scientists, based on insights from innovation 

and transition studies (the work of Rip, Schot, Kemp and Geels, Jacobsson) and 

evolutionary economics (Nelson and Winter, van den Bergh, Bleischwitz and 

Hinterberger). The Dutch energy transition approach is a corporatist approach 

for innovation, enrolling business in processes of transitional change that should 

lead to a more sustainable energy system. A broad portfolio of options is being 

supported. A portfolio of options is generated in a bottom-up, forward looking 

manner in which special attention is given to system innovation. Both the 

technology portfolio and policies should develop with experience. The approach 

is forward-looking and adaptive. One might label it as guided evolution with 

variations being selected in a forward-manner by knowledgeable actors willing to 

invest in the selected innovations, the use of strategic learning projects (transition 

experiments) and the use of special programmes and instruments. It is a 

Darwinist approach which relies on market selection but does not do so in a 

blind way. 

Initially, the energy transition was a self-contained process, largely separated from 

existing policies for energy savings and the development of sustainable energy 

sources. It is now one of the pillars of the overall government approach for climate 

change. Internationally, contacts have been established with Finland, the UK, Austria 

and Denmark, which are using similar approaches. The Ministries of Environment 

(VROM) and Economic Affairs (EZ) are collaborating with each other on energy 

innovation issues, both national and internationally. 

It is an approach of ecological modernisation in which special attention is given to 

system innovation, as a new element. Options to make the existing energy system 

more sustainable (such as carbon capture and sequestering) are not excluded. They 

are also receiving attention and support. It bears noting that despite the attention to 

system-innovation it is entirely possible that coal-fired power plants and nuclear 

power plants will be build in the years to come, even when nuclear energy is not a 

transition path (clean coal is an official transition option but carbon capture and 

sequestering is not a proved technology yet). In the privatised energy markets, 

electricity producers can opt for those options. The commitment to privatisation and

310 R. Kemp 

liberal energy markets is not helpful to the energy transition process (Kern and 

Howlett 2009). 

In the eyes of the Dutch government, the energyapproachsofarisasuccess, 

by being able to exploit latent business interests in sustainable energy. 

Alternative energy (use) systems are worked at in a prudent manner through 

special learning projects and programmes. Policies for innovation are combined 

with policies to achieve immediate carbon reductions, through carbon trading, 

covenants about energy savings and a support scheme for sustainable energy 

production. 

The transition literature sparked a debate about possibilities for managing transitions 

and the DRIFT transition management model 11 . Smith et al. (2005) together with Jacob 

(2007) criticise the idea of transitions occurring through niche development processes, 

pointing to other pathways and the need for regime-changing policies to complement 

innovation support schemes. 

Shove and Walker (2007) are openly critical of the “transition through 

modernisation” idea and transition management approach. They doubt the ability 

of societies to transform themselves and criticise the central role given to technical 

change in societal transitions (arguing that culture and social practices have been 

neglected). 

Transition management is also criticised for being an elitist and technocratic 

approach of modernisation (Hendriks 2008; see also Smith and Kern 2007) for the 

reason that none of the platforms is democratically chosen and the public not really 

being involved. They say the process is dominated by regime actors. 

Meadowcroft (2009) questions the possibility for achieving closure through 

willful transition policies, saying that transitions are messy and open processes. 

At a workshop in Germany where I presented the Dutch transition approach, the 

approach was criticized for not delivering much on renewable energy and 

greenhouse gas reductions. It is true that The Netherlands have been underachieving 

in terms of renewable energy and CO2 emission reduction. The share of renewable 

electricity in the Netherlands (9% in 2010) is far below the European average of 

22% for the EU15 and 21% for the EU27 (see Appendix II). CO2 levels have not 

fallen. In 2008 CO2 emissions were higher than in 2007. In terms of CO2 

equivalents a 3% reduction has been achieved in greenhouse gas emissions, which is 

half of the 6% reduction that is required to achieve according to the Kyoto protocol. 

It is wrong to blame the Dutch energy transition approach for this as it is just one 

element of sustainable energy policy. The transition approach is an approach for 

achieving long-term benefits, not short-term reductions in CO2. One may question 

whether a broad portfolio is not too broad. A broad portfolio may be something for 

a big country such as Germany and not something for a small country with limited 

resources. The dominance of incumbents has been acknowledged by Hugo 

Brouwer, the director of the energy transition process but no steps have been 

undertaken against this. 

11 

In Kemp (2009) the various criticisms leveled against transition management are discussed more 

extensively.


Germany moved much further into the direction of a low-carbon economy than 

the Netherlands. But this owed more to political circumstances: the willingness to 

stimulate renewable energy. The German experience shows that market pull can 

stimulate not only diffusion but also innovation. 

One important conclusion for policy is that for bringing about a transition 

something more is needed than innovation support. For instance for achieving a 

transition to a low-carbon economy, environmental taxes and other carbon reducing 

policies are needed, as pointed out by environmental economists such as Ekins and 

Bleischwitz. It was hoped by this author that the commitment to sustainability 

transitions helps to make such choices, but this did not happen. As countries are 

unlikely to unilaterally introduce carbon-restraining policies for economic fears, it is 

important to have international carbon-reducing policies. The European Emission 

Trading system is an important development in this respect. The Netherlands is 

relying on ETS and sectoral covenants for achieving reductions in greenhouse gas 

reductions. 

As an innovation support approach the Dutch transition management model is a 

sophisticated approach which fits with modern innovation system thinking which 

says that policy should be concerned with 1) management of interfaces, (2) 

organizing (innovation) systems, (3) providing a platform for learning and 

experimenting, (4) providing an infrastructure for strategic intelligence and (5) 

stimulating demand articulation, strategy and vision development (Smits and 

Kuhlman 2004; see also Grin and Grunwald 2000). 

By relying on adaptive portfolio’s two possible mistakes of sustainable energy 

policy possibly may be prevented, 1) the promotion of short-term options which 

comes from the use of technology-blind generic support policies such as carbon 

taxes or cap and trade systems (which despite being “technology-blind” are not 

technology neutral at all because they favour low-hanging fruit and regimepreserving 

change (Jacobsson et al. 2009), and 2) picking losers (technologies 

and system configurations which are suboptimal) through technology-specific 

policies. Here we should add to say that there are good reasons for relying on 

market-based instruments (to achieve carbon reductions at a low cost) and for 

engaging in technology-support but that a combination of such policies is 

desirable. 

When engaging in technology specific support policies one task for policy is to 

not fall prey to special interests, hypes and undue criticisms. The support given to 

the first generation biofuels turned out to be wrong. The philosophy of guided 

evolution used in the Netherlands appears a good one as the transition to a lowcarbon 

economy really consists of two challenges: to reduce carbon emissions and to 

contain the side-effects of low-carbon energy technologies, whether nuclear, wind 

power, or systems of carbon capturing and sequestering. All new energy 

technologies come with specific dangers and hazards, which have to be anticipated 

and addressed. For sustainable energy there are no technical fixes, nor are there 

perfect instruments. There is a need for policy to be more concerned with system 

change. The capacity to do so has to be created. It can be created in different ways. 

The Dutch model described in this article is one possible way. It is not a substitute 

for control policies such as environmental taxes and regulations, which remain 

necessary.

312 R. Kemp 

Appendix I 

Table 7 Overview of transition platforms, pathways and experiments 

Platforms Pathways 

Chain efficiency 

Goal: savings in the annual use of energy 

in production chains of: 

- 40 à 50 PJ by 2010 KE 1: Renewal of production systems 

- 150 à 180 PJ by 2030 KE 2: sustainable paper chains 

- 240 à 300 PJ by 2050 KE 3: sustainable agricultural chains 

Green resources 

Goal: to replace 30% of fossil fuels by 

GG 1: sustainable biomass production 

green resources by 2030 

GG 2: biomass import chain 

GG 3: Co-production of chemicals, transport fuels, 

electricity and heat 

GG 4: production of SNG 

GG 5: Innovative use of biobased raw materials for 

non-food/non-energy applications and making 

existing chemical products and processes more 

sustainable 

New gas 

Goal: to become the most clean and 

NG 1: Energy saving in the built environment 

innovative gas country in the world 

NG 2: Micro and mini CHP 

NG 3: clean natural gas 

NG 4: Green gas 

Sustainable mobility 

Goals: 

Factor 2 reduction in GHG emissions 

DM 1: Hybrid and electric vehicles 

from new vehicles in 2015 

Factor 3 reduction in GHG emissions 

DM 2: Biofuels 

for the entire automobile fleet 2035 

DM 3: Hydrogen vehicles 

DM 4: Intelligent transport systems 

Sustainable electricity 

Goal: A share of renewable energy of 

DE 1: Wind onshore 

40% by 2020 and a CO2-free energy 

DE 2: Wind offshore 

supply by 2050 

DE 3: solar PV 

DE 4: centralised infrastructure 

DE 5: decentralised infrastr 

Built environment 

Goal: by 2030 a 30% reduction in the use GO 1: Existing buildings 

of energy in the built environment, 

GO 2: Innovation 

compared to 2005 

GO 3: Regulations 

Energy-producing greenhouse 

Goals for 2020: KE 1: Solar heating 

Climate-neutral (new) greenhouses KE 2: Use of earth heat


Table 7 (continued) 

Platforms Pathways 

48% reduction in CO2 emissions KE 3: Biofuels 

Producer of sustainable heat and energy KE 4: Efficient use of light 

A significant reduction in fossil fuel use KE 5: Cultivation strategies and energy-low crops 

KE 6: Renewable electricity production 

KE 7: Use of CO2 

Kern and Smith (2008), http://www.creatieve-energie.nl/ and internet search 

Appendix II 

Table 8 Electricity generated from renewable sources (% of gross electricity consumption) 

2000 2001 2002 2003 2004 2005 2006 2007 2010 

European Union (27 countries) 13.8 14.4 12.9 12.9 13.9 14.0 14.6 15.6 21.0 

European Union (15 countries) 14.6 15.2 13.5 13.7 14.7 14.5 15.3 16.6 22.0 

Belgium 1.5 1.6 1.8 1.8 2.1 2.8 3.9 4.2 6.0 

Bulgaria 7.4 4.7 6.0 7.8 8.9 11.8 11.2 7.5 11.0 

Czech Republic 3.6 4.0 4.6 2.8 4.0 4.5 4.9 4.7 8.0 

Denmark 16.7 17.3 19.9 23.2 27.1 28.3 26.0 29.0 29.0 

Germany (including ex-GDR from 1991) 6.5 6.5 8.1 8.2 9.5 10.5 12.0 15.1 12.5 

Estonia 0.3 0.2 0.5 0.6 0.7 1.1 1.4 1.5 5.1 

Ireland 4.9 4.2 5.4 4.3 5.1 6.8 8.5 9.3 13.2 

Greece 7.7 5.2 6.2 9.7 9.5 10.0 12.1 6.8 20.1 

Spain 15.7 20.7 13.8 21.7 18.5 15.0 17.7 20.0 29.4 

France 15.1 16.5 13.7 13.0 12.9 11.3 12.5 13.3 21.0 

Italy 16.0 16.8 14.3 13.7 15.9 14.1 14.5 13.7 22.55 

Cyprus 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.0 

Latvia 47.7 46.1 39.3 35.4 47.1 48.4 37.7 36.4 49.3 

Lithuania 3.4 3.0 3.2 2.8 3.5 3.9 3.6 4.6 7.0 

Luxembourg (Grand-Duché) 2.9 1.6 2.8 2.3 3.2 3.2 3.4 3.7 5.7 

Hungary 0.7 0.8 0.7 0.9 2.3 4.6 3.7 4.6 3.6 

Malta 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0 

Netherlands 3.9 4.0 3.6 4.7 5.7 7.5 7.9 7.6 9.0 

Austria 72.4 67.2 66.1 53.1 58.7 57.4 56.6 59.8 78.1 

Poland 1.7 2.0 2.0 1.6 2.1 2.9 2.9 3.5 7.5 

Portugal 29.4 34.2 20.8 36.4 24.4 16.0 29.4 30.1 39.0 

Romania 28.8 28.4 30.8 24.3 29.9 35.8 31.4 26.9 33.0 

Slovenia 31.7 30.5 25.4 22.0 29.1 24.2 24.4 22.1 33.6 

Slovakia 16.9 17.9 19.2 12.4 14.4 16.7 16.6 16.6 31.0 

Finland 28.5 25.7 23.7 21.8 28.3 26.9 24.0 26.0 31.5 

Sweden 55.4 54.1 46.9 39.9 46.1 54.3 48.2 52.1 60.0 

United Kingdom 2.7 2.5 2.9 2.8 3.7 4.3 4.6 5.1 10.0

314 R. Kemp 

Open Access This article is distributed under the terms of the Creative Commons Attribution 

Noncommercial License which permits any noncommercial use, distribution, and reproduction in any 

medium, provided the original author(s) and source are credited. 

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DOI 10.1007/s10368-010-0167-7 


Multi-agent modeling of economic innovation dynamics 

and its implications for analyzing emission impacts 

Frank Beckenbach & Ramón Briegel 



Abstract In this elaboration we focus on the role of multi-agent systems as a tool 

for modeling economic dynamics. Hence, at the beginning the specific features of 

this tool are considered. Taking the example of explaining the relationship between 

innovations and economic growth it will be shown after that how the tool of multiagent 

modeling can be used for the following purposes: (1) for explaining the 

occurrence of innovations, (2) for specifying the effects these innovations have on 

economic growth, (3) for linking emission impacts to this growth and finally (4) for 

exemplarily assessing political options to reduce these impacts. 

Keywords Innovation . Economic growth . Simulation . Multi-agent model . 

Rebound effect . Emission abatement 


Undoubtedly many of the observable impacts on ecological systems (e.g. depletion 

of minerals and species, emissions and waste) can be derived from economic 

activities. But the relationship between the two is far from being fully clarified in 

scientific analysis. Either the focus on this impact perspective and/or lack of 

economic knowledge often leads to a specific framing of economic analysis in this 

environmental context: Firstly, only economic aggregates (like gross domestic 

product) and their dynamics are considered; secondly, this analysis is normally 

carried out by using computable modeling frame works (like computable general 

equilibrium models). What is missing in such a framework is a realistic 

Role of the funding source This article is based on research conducted within the research project “2nd 

order innovations? An actor oriented analysis of the genesis of knowledge and institutions in regional 

innovation systems”, which was funded by the VolkswagenStiftung, Germany. 

F. Beckenbach (*) : R. Briegel 

Faculty of Economics, Department of Ecological and Behavioral Economics, University of Kassel, 

Untere Königsstraße 71, 34109 Kassel, Germany 

e-mail: beckenbach@wirtschaft.uni-kassel.de

318 F. Beckenbach, R. Briegel 

consideration of the microeconomic foundation for the driving forces of economic 

processes. To assume a representative optimizing agency is not sufficient in this 

context because neither behavioral constraints (in terms of information processing 

and knowledge acquisition) nor non-linear interaction effects between economic 

actors can be taken into account by making this assumption. A realistic view on the 

microeconomic background of observable economic aggregates is not only 

important for explaining the (aggregate) economic output itself, it is also essential 

for assessing the possibilities and constraints for political regulation. 

The problem at stake here can be illustrated by referring to the endeavor to model the 

climate change. Obviously there is a dichotomy between the model compartments 

related to the natural and ecological components of the climate change on one side and 

the model compartment portraying the economic dynamics on the other side. Whereas 

the former is usually conceptualized as a complex adaptive system the latter is framed as 

a more or less straight-forward optimization machine (e.g. IPCC 2007; Rayner and 

Malone 1998; Janssen 1998; McGuffie and Henderson-Sellers 1997; Walker and 

Steffen 1996; Nordhaus1992). Hence, there is a complexity gap between these two 

model compartments raising the question of their general compatibility. Furthermore 

concepts of aggregated growth play an essential role in the architecture of the 

economic modeling compartment. Due to the requirement of prognosis computable 

general equilibrium models are the most preferred model designs in this domain of 

economic research (e.g. Nordhaus and Bojer 2000).Ameaningfulaccesstoevaluating 

political regulation cannot be given in such a context because there is no possibility to 

relate political measures to the action of individuals, organizations or groups of both. 1 

We are suggesting to fill this gap of micro-foundation in economic analysis by 

using a multi-agent framework. In such a framework there is no necessity to confine 

the analysis to economic aggregates and to a corresponding stylized microfoundation. 

Rather different types of agents as well as their interaction can be 

conceptualized as the driving forces for the (aggregate) economic dynamics without 

missing the property of computability. At the same time by referring to agents (and 

their interactions) the addressees of political regulation are explicitly taken into 

account. Hence, assessing political options from an agent-based perspective is 

possible in such a framework. 

In what follows the main focus is on methodological issues. It will be shown how 

aggregate economic dynamics can be (re-)constructed by using such a multi-agent 

framework. Therefore we will not deal with the problem of empirical calibration of 

multi-agent models. 2 For demonstrating the importance of such an agent-based 

approach we will take the example of innovation induced market dynamics. Looking 

at modern theories of growth there seems to be a consensus that innovation is of 

1 This problem is often circumvented by postulating targets (e.g. in terms of reducing emissions) without 

showing by means of which transitions agents can meet these targets and how these transitions can be 

triggered. If this would be specified the uncertainty with regard to emission scenarios could be reduced (cf. 

IPCC 2007; Pielke et al. 2008). 

2 Depending on data availability there are generally two different ways to calibrate the initial values of the 

state variables and the parameters of the model: either indirectly by postulating the reproduction of given 

data time series or directly by doing behavioral observations (cf. Beckenbach et al. 2009; Beckenbach and 

Daskalakis 2008; Windrum et al. 2007; Edmonds 2001).

Multi-agent modeling of economic innovation dynamics and its implications 319 

utmost importance for explaining the dynamics of economic growth and—as one has 

to add by encompassing latest developments in the real economy—stagnation. The 

implication such an approach has for the dynamics of ecological impacts is 

demonstrated by taking an exemplary emission related to economic activity (e.g. 

CO2) into account. 3 Such a methodological reflection can be considered as a first 

step for conceptualizing a more realistic economic compartment in combined 

modeling of climate change. It is only in such a broadened perspective that the 

ecological boundary conditions for economic activities as well as the influence of 

impacts generated by economic activities on the ecological dynamics itself can be 

analyzed more closely. 

2 What multi-agent modeling is about 

Multi-agent systems are the appropriate modeling framework if the focus of the 

analysis is on a property of the system encompassing all its elements (macro-property) 

not simply derivable from analyzing singular elements or by aggregating the elements. 

Rather this macro-property is shown to result from the interaction of the elements 

which are autonomous in that they have a certain degree of freedom in what they can 

do. Neither the way they are acting nor what they are doing is therefore 

predetermined by general or situational conditions. Hence, these elements—the 

agents—have the possibility to adapt their states according to different conditions for 

action they can observe (e.g. social results from individual actions like prices). 

Furthermore the autonomy of the agents includes a variable way of interaction with 

other agents: according to the experience they face agents can select different ways 

to coordinate their own action with others. Even if everything else (e.g. initial 

endowments) should be the same for all agents this autonomy of agents makes them 

heterogeneous in the course of time due to the different way they are adapting and 

coordinating their activities. In short, multi-agent modeling is an adequate tool if a 

“complex adaptive system” is under consideration having emergent properties 

derivable from interacting autonomous and heterogeneous agents (cf. Holland 1996, 

1998). 

This modeling tool is originated in artificial intelligence research in that it is a 

radical way to portray the potentials of distributed intelligence in contradistinction 

to expert systems (cf. Russell and Norvig 1995). Agents are then mapped as (parts 

of) computer programs interacting with each other. Taking into account the wellknown 

intricacies of modeling social interaction in general and especially market 

interaction (cf. e.g. Lee and Keen 2004) it is almost natural to apply multi-agent 

models in this context and considering agents as a representation of human beings. 4 

Then the limited capability of agents to generate and to perceive information as a 

background for their way to act is considered as a partial representation of the 

3 Hence, due to methodological reasons we will neither deal with interacting emissions, nor with impacts 

related to the extraction side, nor with the effects all these impacts have on the state and dynamics of the 

various parts of the ecological system. 

4 This could be either a single human being in its essential properties or a group of human beings having 

at least one common property being essential for their way to act.


cognitive processes accrued to real human beings. This necessitates to enrich this 

modeling of human cognitive processes by picking up insights from sciences 

investigating the behavior of real human beings like modern (cognitive) 

psychology, neuroscience as well as experimental economics. According to the 

findings in these behavioral sciences limited short-term memory capacities, 

patterns of perception and understanding (like frames, schemata, scripts, mental 

maps etc.) as well as the cognitive economizing included therein (manifest in the 

prominent role of routines and habits), different types of learning as well as the 

process of selecting and weighing goals seem to be an essential part of 

the (limited) capabilities of human beings to act (cf. Camerer et al. 2005; Gintis 

2000). Multi-agent models are on one side a framework predestined for 

incorporating these insights (cf. Sun 2001, 2006); on the other side there is a 

constraint in that these insights have to be translated into a computable framework and 

in that incorporating the above mentioned insights should contribute to the emergent 

property at stake. Hence, the problems of arbitrariness arising if Pandora’s boxof 

bounded rationality (Simon 2000) is opened can at least be constrained in a multiagent 

modeling framework: there is firstly a need of computability and secondly a 

need for plausibility of the assumptions borrowed from the modern behavioral 

sciences for the given modeling context. 

According to this strand of thought agent-based modeling has been applied to a 

lot of phenomena belonging to the realm of economics (cf. the overview in 

Tesfatsion 2002; Tesfatsion and Judd 2006), especially market processes (Kirman 

and Vriend 2001; Farmer 2001; Luna and Stefansson 2000), technological change 

(Dawid 2006; Fagiolo and Dosi 2003), network dynamics (Wilhite 2001) and 

organizations (Chung and Harrington 2006; Klos and Nooteboom 2001; Prietula et 

al. 1998). The same is true for ecological phenomena resulting from human impacts. 

Here a special emphasis has been laid on common pool resources and land use 

patterns (cf. the overview in Janssen 2002, 2004). Only recently the question has 

been raised if agent-based modeling is an appropriate tool for analyzing climate 

change adaptation and sustainability issues (cf. Balbi and Giupponi 2009 for a 

survey). These studies are a starting point for revealing the potential of multi-agent 

modeling related to real human beings. Especially with regards to economic 

phenomena there are still multiple opportunities to unfold and to incorporate 

ideas about bounded rationality, non-linear interaction in markets and ‘far-fromequilibrium’-regularities 

on the macro-level into a multi-agent framework. In the 

following section we will demonstrate how the dynamics of economic aggregates 

can be explained by agents and their interaction both being based on modern 

behavioral insights. 

3 Agent-based analysis of innovation dynamics 

In this context economic growth (in aggregated monetary terms) is conceptualized as 

an emergent property (as explained in section 2). That means growth cannot be 

derived by simply analyzing a representative economic entity or by only aggregating 

all entities of an economy under investigation. Hence, there is no simple functional 

relationship between economic inputs (like ‘capital’, ‘labor’ etc) and outputs (like the


produced amount of commodities and services expressed in monetary terms). 5 As 

already mentioned in section 1 there are (at least) two basic reasons for being skeptical 

about such a simple production equation: the behavioral complexity of individuals (or 

agents) investing capital, labor etc. and the non-linear interaction effects between these 

agents. The agents we will focus on are firms. Undoubtedly they play the most 

important part for generating growth in the economy. In the case of firms the 

adaptive capacity required for the agents in a multi-agent framework (cf. section 2) 

is given in terms of endowments (finance, knowledge) and different modes of 

action (like routines, choices etc.). The latter circumscribe different in-house 

capacities to perceive a situation, to use information as well as knowledge and to 

select an activity. Furthermore firms have an adaptive potential in determining their 

way of interaction with other firms (indirect market interaction, direct cooperation 

or loose network relations). Due to empirical evidence on one side and the 

corresponding shortcomings in modern economic growth theory on the other side 

we will confine ourselves to analyze the creation of novelties (innovation and 

imitation) by firms as a driver for economic growth. Creating novelties is a 

temporary (very resource-consuming) activity of firms involving a high risk of 

failure. Accordingly novelty creating activities of firms are triggered by specific 

behavioral and competitive conditions. 6 If it is successful a novelty will generate 

additional activities; at the same token a devaluation or substitution of old activities 

will take place. 7 Hence, the overall effect of novelties for aggregates of economic 

activities is by no means trivial. 

For grasping the relationship between novelty creating activities of agents and 

the growth of economic aggregates a multi-level approach is suggested (cf. Fig. 1). 

The first level specifies the triggering conditions for novelty creating activities for 

the agents i.e. firms. Here the behavioral elements and the modes of actions for the 

firms are portrayed by using an agent-based approach. On the second level the 

consequences of successful innovations and imitations in a given sector of economic 

activities are dealt with. This depends on the frequency of successful novelties and 

on the way they diffuse in that sector. We use an agent-related functional approach 

applying difference equations for depicting the stylized facts of the diffusion 

dynamics. Finally on the third level sectoral interdependencies are taken into 

account. By referring to an accounting approach (input/output-table) the diffusion 

effects of novelties in one sector for other sectors can be traced. Only if these 

different levels of economic dynamics are separated as well as related to each other it 

is possible to derive aggregate effects of novelties for the whole economy. This 

5 To assume one or several simple relations (e.g. as aggregated equations or as production functions) is still the 

state of the art in modern growth theory (cf. e.g. Fine 2000). No attempt has been made to show that these are 

empirically and methodologically legitimate assumptions. Using evolutionary methodologies allowing 

disaggregate defines an alternative path for conceptualizing growth in general and especially environmental 

innovation (cf. Frenken and Faber 2009). In the sequel we will follow this path of economic thinking. 

6 This essential feature of novelty creation is ignored in theories of ‘endogenous growth’ (e.g. Romer 

1990) where r&d is a continuous and riskless activity separated from other firm activities. 

7 To ignore this (non-linear) interdependency of new and old activities (and of their outcomes 

respectively) is another failure of most contributions to ‘endogenous growth theory’: here every 

innovation is immediately patented and the new activity is simply an add-on for total production (cf. 

Romer 1990).


Fig. 1 Overview of multi-level approach 

procedure manifests the importance of the multi-scale property for analyzing the 

economy as a ‘complex adaptive system’ (cf. Arthur et al. 1997). 

On the first agent-related level the question to answer is: Under what conditions 

and how do agents create novelties or—in knowledge related terms—under what 

conditions do agents search for new knowledge? Letting a principal methodological 

caveat against this question apart 8 there are two types of answers to it. In the 

‘functional approach’ (mainly originated in the work of Hayek) a strategic (first 

mover) advantage for successful creators of novelties is derived from competition. 

From this assertion it is directly concluded that there is a person/an agent who makes 

use of this advantage. In the ‘personal approach’ (mainly originated in the work of 

Schumpeter) it is assumed that there simply is a specific type of agents whose main 

profession is to innovate, i.e. the entrepreneurs. Both approaches are not sufficient in 

explanatory terms. In the personal approach it is neglected that innovation is a 

temporary activity which can be attributed in principle to every economic agent; in 

the functional approach no explanation is given why only a part of a whole 

population linked by a competitive process is in fact innovating and what kind of 

motives these innovating agents have. 

To avoid these shortcomings in explaining the novelty creation by firm agents it is 

necessary to take up insights of modern behavioural research. There exist a lot of 

conceptual ideas about a behavioral foundation of economic activities in the 

literature. 9 But most of them are not related to novelty creation or not even oriented 

towards including different modes of activities. Hence, in this literature, empirical 

evidence, if given at all, is only related to parts of a behavioral framework needed 

here. Therefore it is necessary to include behavioral evidence as a criterion for 

selecting conceptual ideas. For elaborating a behavioral synthesis we combine the 

8 According to this caveat the novelty creating process is totally conjectural without anything to 

generalize. Due to the idiosyncratic nature of the processes as well as of the persons involved in 

innovations there is seen only a limited possibility for some after-the-fact analysis on an aggregated level 

(cf. e.g. Vromen 2001). 

9 Most prominent in this respect are revisions of the expected utility theory (e.g. prospect theory; cf. 

Kahneman and Tversky 1979) and enhancements of game theory (cf. Gintis 2003).


approaches of Ajzen (1991) and the Carnegie School (March and Simon 1993; Cyert 

and March 1992) both of which have been tested and approved empirically. 

According to this behavioral synthesis (cf. Beckenbach et al. 2007) the traditional 

microeconomic approach (focusing mainly on preferences and constraints) is 

reshaped and enhanced. The major behavioral explanantia are attitudes (instead of 

preferences), endowments as well as control abilities (instead of constraints) and 

norms (reflecting a minimum of social embeddedness). Instead of the unrealistic 

optimization rule a satisficing rule (related to an aspiration level) in pursuing and 

balancing different goals is assumed as the central mechanism of cognitive control. 

As already mentioned in section 2 the agent’s ability to act is given in terms of 

different modes of action which are selected according to time-dependent 

constellations of the behavioral explanantia. 10 Corresponding to the multiple-self 

nature of economic actors these behavioral elements are feeding different cognitive 

forces each of which is directed in favor of a possible mode of action. 11 The 

strongest force determines which mode of action will be pursued by the agent. 

Hence, the formation of patterns (routines) as well as erosion of patterns (novelty 

creation) can be explained on the individual level. A graphical overview for this 

behavioral architecture is given in Fig. 2. 

Taking routines as the default mode of action we define the preservation force 

related to it simply as: 

F0 ¼ 1 ð1Þ 

The force to overcome this routine mode of action is further differentiated in the 

force directed to imitation (F1) and the force directed to innovation (F2). Formalizing 

these forces necessitates to distinguish sub-forces or force components (fi) picking 

up the different traits and state variables characterizing the agents. 

The first force component to consider here is curiosity which is strongly related to 

the phenomenon of ‘slack’, i.e. the reserve capacities in terms of knowledge (kr) and 

finance (fr). In any given time step this slack is tantamount to balancing the given 

state of knowledge and finance on one side and the amount of these resources 

needed for a given mode of action on the other side. Again, the intensity of curiosity 

triggered by this slack is depending on a personal trait, the exploration drive (w0). 

Hence, curiosity is formally defined as 

f 0ðÞ¼w0 t ðkrðÞþfr t ðÞ t Þ: ð2Þ 

The other two force components to take into account here are related to the goals 

of the agent: profit (p) and market share (m). They formalize the degree of 

satisfaction of the goal attainment indicated by the relationship of the aspiration level 

for profits (asp) and the aspiration level for market share (asm) to the actual degree 

10 

These explanantia—in model terms: variables—are moderated by behavioral traits (e.g. risk attitude, 

curiosity)—in model terms: parameters. 

11 

In the present context only routine, innovation and imitation are taken into account.


Fig. 2 Specification of agent’s behavior 

of goal attainment in a given time step. For each of these goal components 

parameters in terms of weight (w1, w2) and elasticity (ε1, ε2) are given. The force 

components for profit aspiration and market share aspiration can be formalized 

as: 

f 1ðÞ¼w1 t 

aspðÞ t 

pt ðÞ 

"2 asmðÞ t 

f 2ðÞ¼w2 t 

: ð4Þ 

mt ðÞ 

The aspiration levels included in these force components are updated at the end of 

each time step. For the profit aspiration this updating formally means: 

"1 

ð3Þ 

aspðtþ1Þ ¼ ð1fÞ aspðÞþfp t ðÞ t 

ð5Þ 

(and analogously for asm) where f is the flexibility of adaptation, which is another 

personal trait (0 f 1). 

Then the force directed to imitation can be formalized as: 

F1 ¼ f 1 þ f 2 

ð6Þ 

cim 

with cim as the parameter for the expected costs of an imitation. 

The force directed to innovation also includes the essential force components f1 

and f2. But it has three features making it different from the imitation force: Firstly, 

due to the nature of the innovation process curiosity (f0) has to be included.


Secondly, there is a comparative difference in expected costs: the expected costs for 

innovation projects (cin) are higher than the expected cost for imitation projects. 

Thirdly, the innovation force contains a parameter (α) indicating the role of risk 

acceptance. Then the force directed to innovation can be formalized as: 

F2 ¼ a f 0 þ f 1 þ f 2 

cin 

Given the time-dependent amount for F 0,F 1 and F 2, the agent will activate that 

mode of action for which the corresponding force is highest. If this mode of action 

is ‘imitation’ or ‘innovation’ it will be pursued by the agent in addition to its 

ongoing routine activity, i.e. they will start new novelty creating projects. If F1 or 

F2 remain higher than F0 after these projects have been finished, new projects will 

be started. If this is not the case the agent will only pursue routine behavior. Hence, 

it is respected in the simulation model that innovation as well as imitation are 

specific temporary modes of action. 

On the second sectoral level we refer to the stylized facts of diffusion analysis: A 

critical mass has to overcome for initiating a self-feeding diffusion process up to a 

maximum level where all needs are satisfied. Furthermore according to the 

dominance of retarding effects at the beginning of this diffusion process and due 

to the dominance of the promoting effects at later stages of the diffusion process an 

S-shaped time-dependent diffusion curve is assumed (cf. Rogers 1995). Finally, the 

shortcomings of economic growth theory (cf. section 2) necessitate to give 

innovation a twofold effect: a growing of the demand for the products of an 

innovating firm and a substitution for old products. These stylized features of the 

diffusion dynamics are summarized in Fig. 3. 

Fig. 3 Specification of sectoral diffusion dynamics 

ð7Þ


A newly created innovative product (independently of whether it is created 

individually or cooperatively) is characterized by the following parameters which are 

determined randomly but influenced by endogenours variables: 

& demand potential (ypo), & initial value of demand (y(t0)) (at the time when the new product is put on the 

market), 

& threshold value for diffusion, the ‘critical mass’ (yts), and 

& velocity of diffusion (v). 

The expectation value for the demand potential is set proportionally to the 

turnover of the firm and to a certain power of the amount of declarative knowledge 

of the firm(s) that has (have) created the new product (more precisely: to the number 

of knowledge domains where the firm has got knowledge). 12 The expectation values 

for the initial value of demand and for the critical mass are set proportionally to the 

demand potential. The expectation value for the diffusion velocity depends linearly 

on an indicator of the intensity of competition in the corresponding production 

sector. 

The dynamics of final demand for an innovative product follows a stylized 

diffusion model. The final demand for this product of a given firm at the next time 

step y(t+1) is calculated via the following difference equations that leads to a logistic 

increase (resp. decrease) of demand if and only if the current demand y(t) is greater 

(resp. smaller) than the threshold value yts: 

Obviously it holds: 

ytþ ð 1Þ 

¼ yt 

ytþ ð 1Þ 

¼ yt 

ðÞþv yt ðÞ y ð tsÞðypo 

yt ðÞ 

ypo yts ðÞþv yt ðÞ yt ðÞ y ð tsÞ 

yts lim 

t!1 yt ðÞ¼ypo lim 

t!1 yt ðÞ¼yts lim 

t!1 yt ðÞ¼0 if y t0 

if yðt0Þ > yts ; 

if yðt0Þ ¼ yts ; 

ð Þ < y ts : 

if yðÞ t yts; ð8Þ 

if yðÞy t ts : ð9Þ 

If a firm imitates an existing innovative product, the part of the demand potential 

that has not yet been exhausted at that point in time (distance A in Fig. 3) is shared 

equally among the imitating firm and the original innovator(s) (and previous 

imitators if existing). 

After having been adopted by a certain fraction of all consumers and thus having 

reached a certain amount of demand, an innovative product may be devaluated by 

12 The background for this assumption is the positive relation between the broadness of knowledge and 

the firm’s flexibility as regards to the demand side.


further technological process and substituted by newer innovative products 

(innovation vintage model). Therefore the total final demand Y(t+1) for products 

of the sector where innovations have been brought to the market 13 is rescaled in such 

a way that it grows only by a certain proportion of the total increase of demand for 

the current innovations. Formally, if there are r innovations in a given sector, the 

total increase of demand for all these innovations is 

wtþ ð 1Þ 

¼ Xr 

k¼1 

ðykðtþ1Þ ykðÞ t Þ: ð10Þ 

If we denote by su the substitution factor (a model parameter measuring the 

degree by which conventional products are substituted by innovative products; 

0 su 1), we can now define the time-dependent scaling factor sf(t) by 

sfðÞ¼ t 

Yt ðÞþð1 suÞ wtþ ð 1Þ 

: ð11Þ 

Yt ðÞþwtþ ð 1Þ 

Rescaling then means that the demand that each firm of this sector faces is 

multiplied by this same factor sf. This leads to an endogenous growth of total final 

demand, which is damped by a partial substitution of demand for conventional (or 

older innovative) products by demand for new innovative products in the same 

sector amounting to (1-sf )Y(t). The growth rate of final demand then comes to 

Ytþ ð 1Þ 

Yt ðÞ ð1suÞwtþ ð 1Þ 

¼ : ð12Þ 

Yt ðÞ 

Yt ðÞ 

The inter-sectoral effects of the diffusion of innovations are the subject matter of 

the third level. The sectoral final demand derived from the innovation activities in a 

given sector is enhanced by the intermediary commodities and services delivered by 

that sector to other sectors. 14 The relation between the final demand component and 

its intermediary components in a given sector are assumed to remain constant. 15 

Hence, if there is an increase in the final demand component of that sector a 

proportional increase is necessary for its intermediary components. Consequently 

further growth is induced in sectors in which these components are produced, which 

in turn induces further growth (in diminishing amount) in other sectors etc.. This 

mechanism is an important part of the growth dynamics being effective in modern 

market economies. 

For calculating this intersectoral dynamics we use input-/output tables (cf. 

Leontief 1991). These are well-known statistical accounting schemes being an 

obligatory part for the System of National Accounts (SNA). In such a table sectoral 

activities are differentiated between an intermediary component and a value added 

13 

The subscript for the sector is skipped here. 

14 

In developed market economies this intermediary part of the sectoral production is on average about 2/3 

of the total sectoral production. 

15 

How these coefficients of intermediary production can be conceptualized dynamically is an intricate 

question which is beyond the scope of this elaboration (cf. Pan 2006).


component. Furthermore two perspectives on the sectoral activities are integrated: 

the perspective of ordering (buying) and delivering (selling). For each sector the 

ordering and delivering activities are balanced to the same amount. The basic 

structure of an input/output table is depicted in Fig. 4. 

4 Linking innovation dynamics and growth 

The emergence of economic growth can now be explained by using this 3-level 

approach. In each sector a multitude of agents is adapting (in different ways) to 

the market competition which in turn is generated by the agents themselves. In the 

given context the most important option for an agent to improve his competitive 

position is to create novelties. Depending on the frequency of successful 

innovations and imitations a different diffusion dynamics in terms of increase of 

total demand and substitution of the demand for old products will result in each 

sector. Summing up the time-dependent sectoral final demand components in 

each time step (Yi(t)) is tantamount to the total net production (net value or value 

added). 

Yt ðÞ¼ Xn 

i¼1 

YiðÞ: t 

ð13Þ 

The gross production in each sector can be calculated by taking into account the 

constant structure of the intermediary production. Denoting the corresponding 

coefficients (i.e. the total production share of the intermediary commodity j in a 

given sector i) by At ðÞ¼ aijðÞ t the Leontief inverse multiplied by the vector of 

sectoral net productions Yt ðÞ¼fYiðÞ t g comes to the vector of sectoral gross 

production (I being the unit matrix): 

XðÞ¼ t ðIAðÞ t Þ 1 Yt ðÞ: ð14Þ 

Summing up the time dependent components of X(t) is tantamount to total gross 

production. 

Fig. 4 Specification of inter-sectoral diffusion dynamics


In Figs. 5 and 6 the results of an exemplary run of the simulation model are shown. 

Here we assume an optimistic scenario leading to an increase of total production by 

300% in 120 time steps (30 years) (Fig. 5, left part). In the right part of Fig. 5 the 

amounts for intermediary and final production as well as primary inputs of the input/ 

out-table (cf. Fig. 4) are represented by columns. What is clearly understandable in 

this example is that in t=120 only about one third of total production is net production 

(value added). That the modes of actions (and their frequencies) at the agent level play 

an essential role for the growth of total production can be verified by looking at Fig. 6. 

In terms of the frequencies of the modes of action the system passes through a 

transition phase (up to about t=50) after which a pattern of moderate irregular 

fluctuations around an average level occur for all modes of action (routine, imitation 

and innovation). It is only in this second phase in which the share of firms pursuing 

only routines and the share of firms additionally creating novelties follows a cyclical 

pattern that the growth of total production increases significantly (cf. Fig. 5, left 

part). 

To sum up, the link between novelty creation and growth is not trivial: First 

of all the innovation activity itself has to be triggered and has to be successful. 

If so, it has a primary growth effect in terms of an increased value added (final 

demand) in the same sector. Furthermore, the secondary effect constituted by 

substitution and devaluation of old products has to be included. Finally the 

inter-sectoral (tertiary) effects of the primary and secondary effect have to be 

considered for getting a comprehensive picture of the dynamics in the whole 

economy. 

5 Driving forces and dynamics of emission impacts 

The multi-level model developed in section 3 and 4 is now enhanced by including 

emissions. Because the main purpose here is to demonstrate the applicability of such 

an approach for analyzing the dynamics of environmental impacts only one 

exemplary emission (e.g. CO 2) is assumed. This emission is related to the level of 

gross production 

net production 

t 

40 

30 

20 

10 

0 

Sector0 

Sector1 

final dem. 

Sector3 

Sector2 

Sector2 

Sector1 

Sector3 

prim.input 

Sector0 

Fig. 5 Gross production over time (left) and sectoral production (input/output-table) in t=120 (right)


Fig. 6 Modes of action (agent-level) over time 

production activity of agents. 16 To begin with, the vintage structure of our 

innovation model has to be explained briefly: The production activities of firm 

agents consist of innovative products generated by previous innovation activities in 

different time steps during the simulation and activities related to conventional (or 

old) products. This vintage structure is of importance for the dynamics of final 

demand as well as for the emission coefficients related to the various innovative 

products (see the next paragraph). 

The driving forces for the internal emission dynamics can be decomposed in four 

different effects. Firstly and most importantly the type of innovation as regards 

emission has to be taken into account. Generally the emissions may increase or 

decrease as a result of innovation. This can be expressed by the time dependent 

development of the emission coefficient, relating the emission and amount of output in 

every time step. For getting an adequate idea about the internal dynamics of generating 

emissions the initial emission coefficient is set on an equal level for all products in all 

sectors. To each newly created innovative product j in some sector i, a product specific 

emission coefficient (emi,j) is associated which is calculated on the basis of the current 

mean emission coefficient of all products in the corresponding sector and the emission 

reducing or increasing effect of innovation. Given this emission-increasing or emissiondecreasing 

nature of innovation, the overall effect of innovation secondly depends on 

the speed of diffusion for the innovated product under consideration. This diffusion 

effect is tantamount to the time-dependent increase in the share of the innovated 

product on the corresponding market. Closely related to this growth effect of diffusion 

is thirdly the substitution effect, i.e. the replacement of old products by new ones 17 on 

the level of final demand. Fourthly, every sector is producing intermediary 

commodities, i.e. commodities not determined to meet the final demand but to be an 

input for production in other sectors. That part of the intermediary commodities 

delivered by innovating firms is also shaped by the vintage structure: It is assumed that 

16 

This activity level is measured in value terms because price fluctuations are not dealt with in the model. 

17 

This means that conventional products as well as older innovative products are substituted by newer 

innovative products.


the emission coefficients for these intermediary commodities follow the same dynamics 

as the mean emission coefficient for all final products; in other words, the same 

emission coefficient is valid for the total gross production in the sector and not only for 

the mean of innovative products for the consumer market. 

The total emission in a given time step and a given sector and of the economy can 

be determined by taking these four effects into account and summing up over all 

innovative and conventional 18 products: 

emiðÞ¼ t 

PiðÞ t 

emiðt1ÞYi;old þ emi; j Yi; jðÞ t 

j¼1 

Yi;total 

ð15Þ 

where Pj(t) denotes the number of innovative products in sector i that are on the 

market in time step t. 

The overall emission in the time step and sector under consideration then amounts 

to: 

EmiðÞ¼emi t ðÞXi t ðÞ: t 

ð16Þ 

Two of these effects shall be considered more closely: the type of innovation and 

the velocity of the diffusion v (a model parameter, cf. section 3 (4)) of given 

innovations. The former is determined by the model parameter M (change factor of 

emission coefficient) which co-determines the emission coefficient for an innovative 

product created in time step t: 19 

emi;jðÞ¼Memi t ðt1Þ: ð17Þ 

In order to illustrate the influence of these two crucial parameters, we are going to 

analyze the dynamics of the emissions for three exemplary cases: (i) the overall 

growth case (M>1, v is high), (ii) the case with decreasing emission and fast 

diffusion (M


Fig. 7 Case (i) for growth dynamics 

(upper right part of Fig. 7). Due to the time-dependent intersectoral effects 

determining the size of a given sector, the innovation frequency and its effect on 

final demand alone is not sufficient for deriving the relative share of the sectoral 

contributions to the emissions. As can be seen from the lower left part of Fig. 7 

sector 1 being dominant in terms of innovation frequency almost for the whole time 

span is only in the last third part of the time span increasing its relative share of 

emissions. The lower right part of Fig. 7 depicts the time-dependent development of 

the overall emissions. Not surprisingly they are increasing in an exponential manner 

(increase of about 800% in 120 time steps, i.e. 30 years). 

More representative for the developed market economies might be case (ii). 

Whereas the optimistic assumptions about the diffusion dynamics remained 

unchanged compared with case (i), it is assumed now that M=0.85. This means 

that there are boundary conditions given, guaranteeing that in the case of an 

innovation the level of emissions is reduced by 15% (i.e. to 85% of the previous 

level). What is interesting in simulating this case is firstly an almost stable difference 

in terms of emissions in the different sectors (cf. lower left part of Fig. 8). Secondly, 

and even more important is that the sectoral as well as the total emission 

development has essentially two phases: In the first phase (from t=11 to t=45) 

after the initial (transient) phase, 20 the emissions are slightly decreasing. This is 

20 In the initial phase (until about t=10) the model is swinging in: The first innovative products have to be 

developed (which is time-consuming) before they can be put on the market, and their diffusion starts only 

slowly. Therefore the nearly constant level of final demand and emissions in this transient phase rather 

constitutes an artefact of the model.


Fig. 8 Case (ii) for growth dynamics 

tantamount to a dominating innovation effect and the corresponding substitution 

processes of new for old products. Contrary to that, in the second phase (t>45) of the 

emission dynamics things are reversing in that now the growth effect of innovation 

and the corresponding intersectoral effects are becoming superior (cf. lower parts of 

Fig. 8). This is a specific variant of the so-called rebound effect often observable in 

modern market economies (cf. Sorrell 2007). 21 Hence, it may be concluded that in the 

long run the rate of emission abatement on the agent level mentioned above is not 

sufficient for guaranteeing a sustainable reduction of the total amount of emissions. 

Finally case (iii) might be used as an approach to the effect of economic crisis and 

stagnation. It is assumed that the boundary conditions in favor of emission 

abatement still persist but that the diffusion dynamics is hampered due to a 

catastrophic jump in the critical mass the overcoming of which is necessary for a 

successful (self-enforcing) diffusion of new commodities. 22 Considering the 

monetary aggregates (upper left part of Fig. 9) there are three phases: moderate 

growth dynamics until the crisis is occurring (t60 (Cf. section 3 (4)).


Fig. 9 Case (iv) for growth dynamics 

to moderate growth effects in the first phase on one side and the ongoing of 

abatement activities on the other side the substitution effect of innovations dominates 

the growth effect and the emissions in all sectors are decreasing. Before this is 

reversed and the rebound effect can become effective (as in case (ii) above) the 

stagnation occurs and due to the blocked growth dynamics as well as due to the 

negative feedback of the economic performance on further innovation activities 

the amount of emissions remains about constant in all sectors (cf. lower left part of 

Fig. 9). Corresponding to that the innovation-dependent abatement activities are 

abruptly reduced in all sectors (though they differ in the starting point and the speed 

of this reduction) (cf. upper right part of Fig. 9). Finally, innovation activities come 

to a halt, firms are exiting and the total amount of emissions is drastically reduced in 

the crisis proper (t>100; cf. lower left part of Fig. 9). Hence, our simulation results 

indicate that even in a regime of abatement activities of firms economic stagnation 

and crisis are the only self-organized mechanism to circumvent the rebound effect by 

stabilizing or even lowering emissions. 

6 Redirecting innovations as a regulatory option? 

The simulations in the previous section manifest that the emission dynamics is 

strongly influenced by a market induced innovation dynamics which is more or less 

given in all developed market economies. The core of this dynamics is determined 

by a self-organized process in which behavioral states and constellations of market


competition are related to each other triggering different modes of action one of 

which is novelty creation. Due to the difficulty to anticipate the time dependent 

frequency of these modes of action, due to the unpredictable outcome of individual 

novelty creating endeavors, and due to unknown social acceptance of these 

outcomes (in terms of diffusion) there is no possibility to assess or even to plan 

such a process in advance. Rather it necessitates to confine political influence or 

regulation to a trial and error perspective. 23 Nevertheless the exemplary simulation 

analysis given above shows that any kind of political regulation has to face an 

innovation dilemma: If innovation is successful on the individual as well as on the 

social level there is a high probability that it generates growth and if it generates 

growth, it generates additional emissions. The only self-organized way to circumvent 

this dilemma seems to be economic stagnation and crisis. 

Against this background three general options for regulation can be distinguished: 

(i) blocking the core of the innovation dynamics, (ii) fostering differentiation in 

favor of establishing environmental benign technologies as well as products and (iii) 

redirecting the innovation dynamics. Option (i) seems to be unfeasible in that it is 

incompatible with a given market and competition environment. Option (ii) is often 

pursued by political authorities but faces the problem of establishing and protecting a 

niche or—to take it the other way round—it is confronted with the constraints of 

path dependencies (cf. Nill 2009). Due to these constraints for options (i) and (ii) the 

following discussion focuses on option (iii). Without going into the details of an 

instrumental debate it is assumed that regulatory authorities are willing and firms are 

able to implement a predefined path of reducing emissions. This is more specific 

than the usual framing of the problem to reduce emissions (e.g. in the debate about 

climate research) in that economic agents as the main subject of these policy options 

are explicitly taken into account. 

The first regulatory regime to analyze more closely is a short term dynamic 

incremental dynamic abatement of emissions. Setting the initial change factor of 

emission coefficient to 95% (i.e. in the beginning of the simulation, when creating an 

innovative product, a firm has to reduce the emissions per produced unit by 5% 

compared to the mean emission factor of the branch) the innovating firms have to 

comply with the obligation of reducing this change factor of emission coefficient 

(model parameter M; cf. section 5 (2)) by further 5% every 20 time steps (5 years). 

This means that the speed of technological progress in terms of the reduction of 

emission factors is accelerated more and more over the whole simulation. This 

regime is depicted in Fig. 10. 

In formal terms this means 

Mt ðÞ¼0:95 for t < 20; Mtþ ð 20Þ 

¼ Mt ðÞ 0:05 for all t: ð18Þ 

Figure 11 indicates that it is not before t=100 (i.e. only after 5 regulation periods) 

that the emissions in two of the four sectors start to be reduced leading to an overall 

23 

For a specification of this perspective of political regulation cf. Kemp and Zundel 2007 and 

Beckenbach 2007.


change emission coeff. % 

Fig. 10 Incremental dynamic abatement regime 

stagnation of the emissions (cf. Fig. 11, lower part). Hence, it can be concluded 

that this incremental dynamic abatement regime is inappropriate for meeting 

emission reducing targets. Therefore it seems necessary to take more radical 

dynamic abatement regimes into account. Because the firms need at least more 

time for conforming to this more ambitious target the regulatory time span has to 

be longer than in the case of incremental dynamic abatement. 

In the second regulatory regime the obligation for innovating firms is 

to reduce the change factor of emission coefficient by 15% every 40 time 

Fig. 11 Growth dynamics with incremental dynamic abatement regime 

time


change emission coeff. % 

Fig. 12 Radical dynamic abatement regime 

steps, i.e. 10 years (cf. Fig. 12), beginning with 85%. In formal terms this 

means: 

Mt ðÞ¼0:85 for t < 20; Mtþ ð 20Þ 

¼ Mt ðÞ 0:15 for all t: ð19Þ 

As can be seen from Fig. 13 it is only in this strong abatement regime that 

emission targets similar to those politically defined in the climate change debate can 

be met (25% reduction of absolute emissions in 30 years). Comparing the upper 

right part with the lower left part of Fig. 13 it can be deduced that not only the 

Fig. 13 Growth dynamics with radical abatement regime 

time


cost 

Fig. 14 Costs of innovation in the incremental dynamic abatement regime 

innovation dynamics is influencing the sectoral amount of emissions but also the 

intersectoral dynamics modifying the emission related ranking of the sectors as 

regards emission coefficients. 

This clear-cut picture of needing a radical abatement regime for innovating agents to 

comply with given social emission targets is modified if the implicit assumption so far 

that the abatement comes as a free joint product of innovation is given up. Picking up the 

case of incremental dynamic abatement again it is now additionally assumed that the 

costs of abatement are increasing linearly with the amount of reduced emissions 

(starting from the default level of 0.125 there is an increase of 0.005 in every regulation 

period; cf. Fig. 14). These costs are considered as a part of the innovation costs. 

What is obvious from Fig. 15 is firstly, that the frequency of innovations is 

reduced 24 and therefore the growth of final demand is damped (cf. Fig. 15, upper left 

part). Secondly, the spreading of the innovation frequencies between sectors in t>40 

is more distinct than in the case without cost increase (cf. Fig. 11, right upper part in 

comparison to Fig. 15, right upper part). Thirdly, the higher volatility of the behavioral 

innovation force (cf. above) opens up the possibility for synchronous jumps in 

innovation activities in different sectors (as it is the case in t>70) leading to a 

temporary abrupt reduction of emissions before the growth effect is dominating again 

(cf. Fig. 15, lower part). Here again the innovation dilemma mentioned above 

becomes obvious: it is only if the innovation dynamics is effectively damped by cost 

effects that the occurrence of the emission increasing rebound effect can be avoided. 

The simulation runs suggest that only a radical abatement regime with moderate 

additional costs is appropriate to meet emission targets as proposed in the debate on 

climate change. Looking at the reality of technological development on one side and 

of the slow dynamics of environmental policy on the other side one has to be 

skeptical about the technological as well as political feasibility of such a radical 

regime. In both cases the problem of path-dependency will be an important issue. 

Hence, a more realistic alternative seems to be either to face significant abatement 

costs (in economic as well as political terms) bearing the risk of letting the 

innovation process stagnate or to confine oneself to an incremental dynamic 

abatement regime being in danger of not meeting required emission targets. What is 

24 The reason fort hat is that the increase of innovation costs is reducing the relative force toward 

innovation on the agent level (cf. above) Eq. 7. 

time


Fig. 15 Growth dynamics with incremental abatement regime and increasing abatement costs 

obvious here is a double regulation dilemma: Implementing innovation and 

generating growth are features of a self-organized economic process which cannot 

be predicted and influenced precisely; but if regulation does not prescribe ambitious 

emission reduction targets, innovation will imply growth which could overcompensate 

emission reductions associated with the single innovation project. 

Whatever the regulatory options are, the multi-agent model indicates that only 

imposing emission targets is not sufficient. Rather it is necessary to figure out 

abatement paths by taking into account the agents, the context they are operating in, 

and the time scale for regulations. Furthermore: because there are different paths for 

fulfilling (or missing) a target it is necessary to select a path, to update the 

achievements, and—if necessary—to adapt the path features to the new experience. 

In this sense policy should be conceptualized as a part of a broader complex adaptive 

system. 

7 Conclusions 

Emissions are coupled to innovation and growth in a complicated manner. The 

direction of innovation, the velocity of diffusion and the dependencies between 

sectors have been shown as the main sources for this complication. For shedding 

light on these relations the economy was conceptualized a ‘complex adaptive 

system’ having diffusion, growth and emissions as ‘emergent properties’. To 

distinguish different but related levels of activities and especially to include an


agent-based analysis of the dynamics on the micro-level are essential features of 

such an approach. 

By using such a framework it is possible to bring more conceptual realism into 

economic models without losing the required property of computability. In this 

contribution it is suggested to specify bounded rational agents by picking up insights 

of modern behavioral research. The agent’s ability to act is given in terms of 

different modes of action the selection of which depends on behavioral and 

competitive conditions the agents themselves are generating. Novelty creation (i.e. 

innovation and imitation) is one mode of action being triggered endogenously in the 

model. Hence, innovation and imitation are explained endogenously. This is the 

basis for reconstructing the dynamics of economic aggregates without referring to 

representative agencies and optimizing activities. 

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DOI 10.1007/s10368-010-0160-1 


How to increase global resource productivity? Findings 

from modelling in the petrE project 

Christian Lutz 



Abstract The analysis in the chapter is based on the extensive and disaggregated 

global GINFORS model that contains 50 countries and two regions and their 

bilateral trade relations, energy balances, material, macro-economic and structural 

data. The model is applied in the petrE project to analyze the impacts of major 

environmental tax reforms (ETR) and the EU ETS to reach the EU GHG reduction 

targets until 2020. The ETR includes a carbon tax for all non-ETS sectors and a 

material tax. Scenarios look at unilateral EU action and at international cooperation 

by all OECD countries and the major emerging economies. The chapter presents 

some of the modelling results. A major ETR in Europe could significantly reduce 

environmental pressures in Europe while creating additional jobs. Small negative 

GDP impacts are within the range of results of other studies. The results clearly 

demonstrate that only global action with substantial carbon prices may lead to an 

emission path still in line with the 2° target. But even if a far-reaching global climate 

agreement is reached later in 2010, global resource extraction will continue to 

increase without additional international measures. 

Keywords Global modelling . Environmental tax reform . 

Global resource productivity 

JEL Classification C53 . C63 . Q47 . Q52 . Q54 

Acknowledgements PetrE has been funded by the Anglo-German Foundation as part of its “Creating 

sustainable growth in Europe” research initiative. I would also like to thank two anonymous referees for 

helpful comments. 

C. Lutz (*) 

Institute for Economic Structures Research (GWS), Heinrichstr. 30, 49080 Osnabrueck, Germany 

e-mail: lutz@gws-os.com

344 C. Lutz 


This chapter presents results of the petrE (“Resource productivity, environmental tax 

reform and sustainable growth in Europe”) project that has been finished in June 2009 

(Ekins and Speck 2010). PetrE is a three-year project, one of four funded by the Anglo- 

German Foundation as part of its “Creating sustainable growth in Europe” research 

initiative. The analysis is based on the extensive and disaggregated global GINFORS 

model that contains 50 countries and two regions and their bilateral trade relations, energy 

balances, macro-economic and structural data. The GINFORS model integrates material 

input models in nine aggregated material categories, which are based on a global material 

extraction dataset (www.materialflows.net). GINFORS is closed on the global level. 

In the petrE project, the GINFORS model is applied to analyze the impacts of 

major environmental tax reforms (ETR) and the EU Emissions Trading System 

(ETS) to reach the EU GHG reduction targets until 2020. The ETR includes a carbon 

tax for all non-ETS sectors and a material tax. Scenarios look at unilateral EU action 

and at international cooperation by all OECD countries and the major emerging 

economies. While the baseline scenario illustrates developments in the absence of 

policy measures, scenario S1H assumes certain policy measures in the EU (a 

tightened EU ETS cap, the introduction of a carbon tax on the non-ETS sector, and 

introduction of materials taxes), and scenario S3H also includes measures in the 

major OECD countries as well as a carbon tax in the five major emerging economies 

of China, India, Brazil, South Africa and Mexico (G5). 

The chapter builds on two detailed working papers, which present the results on 

the EU and national level (Lutz and Meyer 2009a) and on the global level (Giljum et 

al. 2010). The concept of ETR is discussed in Ekins and Speck (2010). Section 2 

shortly presents the GINFORS model. The model is documented in Meyer et al. 

(2007), Meyer and Lutz (2007) and Lutz et al. (2010). Six scenarios that are outlined 

in Section 3 have been implemented in the course of the petrE project. The baseline 

is adjusted to the latest EU energy forecast (DG TREN 2008) and on the global level 

to the IEA (2008) world energy outlook. Other scenarios build on the GHG emission 

reduction targets of the EU until 2020. Section 5 contains an overview of the 

baseline development. 

In Section 6 simulation results are discussed: A major ETR in Europe could 

significantly reduce environmental pressures in Europe while creating additional 

jobs. Small negative GDP impacts are within the range of results of other studies. 

The results clearly demonstrate that only global action will be able to reach the 2° 

target. But even if a far-reaching global climate agreement is reached in 2010, global 

resource extraction will continue to increase without additional international 

measures. The necessary debate about limits of resource extraction on a global 

level will raise similar questions about international competitiveness and leakage, 

GDP effects and the need of international action as the climate change debate. 

2 The GINFORS model 

The simulation instrument-the global model GINFORS (Global INterindustry 

FORecasting System)-describes the economic development, energy demand, CO 2

How to increase global resource productivity? 345 

emissions and resource inputs for 50 countries, 2 regions, 41 product groups, 12 

energy carriers and 9 resources. The regions are “OPEC” and “Rest of the World”. 

The explicitly modelled region “OPEC” and the 50 countries cover about 95% of 

world GDP and 95% of global CO2 emissions. The aggregated region “Rest of the 

World” is needed for the closure of the system. The model is documented in Meyer 

et al. (2007), Meyer and Lutz (2007) and Lutz et al. (2010). Current applications of 

the model can be found in Giljum et al. (2008a) and Lutz and Meyer (2009b). An 

update of the material models is provided in Lutz and Giljum (2009). 

The main difference to neoclassical CGE models is the representation of prices, 

which are determined due to the mark-up hypothesis by unit costs and not specified 

as long run competitive prices. But this does not mean that the model is demand side 

driven, as the use of input–output models might suggest. Even though demand 

determines production, all demand variables depend on relative prices that are given 

by unit costs of the firms using the mark-up hypothesis, which is typical for 

oligopolistic markets. CGE models assume polipolistic markets, where prices equal 

marginal costs, in contrast. The difference between CGE models and GINFORS can 

be found in the underlying market structure and not in the accentuation of either 

market side. Firms are setting the prices depending on their costs and on the prices of 

competing imports. Demand is reacting to price signals and thus determining 

production. Hence, the modeling of GINFORS includes both demand and supply 

elements. 

Allowance prices and carbon tax rates are endogenous to the model. To avoid 

long solving procedures, the prices are changed in an iterative process manually until 

the GHG reduction target is reached. Allowance prices increase the shadow prices of 

energy carriers and reduce energy demand according to the specific price elasticities. 

Different allocation methods therefore have no direct influence on energy demand 

and the emission levels in the model. Increasing profits of private companies in the 

case of grandfathering deliver other sector and macroeconomic impacts than 

government spending out of auctioning revenues, however. 

All parameters of the model are estimated econometrically, and different 

specifications of the functions are tested against each other, which gives the model 

an empirical validation. An additional confirmation of the model structure as a whole 

is given by the convergence property of the solution which has to be fulfilled year by 

year. The econometric estimations build on times series from OECD, IMF and IEA 

from 1980 to 2006. For a number of variables the data were only available for a 

shorter time period. The modelling philosophy of GINFORS is close to that of 

INFORUM type modelling (Almon 1991) and to that of the model E3ME from 

Cambridge Econometrics (Barker et al. 2007a). Common properties and minor 

differences between E3ME and GINFORS are discussed in Barker et al. (2007b). 

3 Scenarios 

To investigate the impacts of an ETR for Europe six separate scenarios have been 

designed to understand a variety of tax reform options. Each scenario is identified by 

an acronym. The final letter indicates the baseline to which it is compared with L for 

low and H for high energy prices.

346 C. Lutz 

The scenario analysis allows for an understanding of different revenue recycling 

methods and various scales of ETR in order to meet different greenhouse gas 

emissions targets. All scenarios were examined in both E3ME and GINFORS (see 

Ekins and Speck 2010). The scenarios are: 

& BL: Baseline (low energy prices), 

& BH: Baseline sensitivity with high oil price (reference case), 

& Scenario S1L: ETR with revenue recycling designed to meet unilateral EU 2020 

GHG target, 

& Scenario S1H: ETR with revenue recycling designed to meet unilateral EU 2020 

GHG target (high oil price), 

& Scenario S2H: ETR with revenue recycling designed to meet unilateral EU 2020 

GHG target (high oil price), 10% of revenues are spent on eco-innovation 

measures, 

& Scenario S3H: ETR with revenue recycling designed to meet cooperation EU 

2020 GHG target (high oil price). 

The baseline with low energy prices BL has been calibrated to the 2007 PRIMES 

baseline to 2030, published by the European Commission (DG TREN 2008). For the 

high oil price baseline (reference case BH) the effect of a higher oil price, 

particularly over the period 2008–10 is assumed. In this scenario coal and gas prices 

develop in line with the increases to the oil price. In this scenario energy prices are 

close to the assumptions in the current IEA World Energy Outlook (2008). Different 

oil price assumptions are shown in Fig. 1. 

Each of the ETR scenarios has the same key taxation components: 

& a carbon tax rate is introduced to all non EU ETS sectors equal to the carbon price 

in the EU ETS that delivers an overall 20% reduction in greenhouse gas emissions 

by 2020, in the international cooperation scenario this is extended to 30%, 

& aviation is included in the EU ETS at the end of Phase 2, 

& power generation sector EU ETS permits are fully auctioned in Phase 3 of the 

EU ETS, 

140 

120 

100 

80 

60 

40 

20 

0 

BL 

BH 

1990 1995 2000 2005 2010 2015 2020 

Fig. 1 International oil price in the low and high energy price scenarios in $2005/b


& all other EU ETS permits are 50% auctioned in 2013 increasing to 100% in 

2020, 

& material taxes are introduced at 5% of total price in 2010 increasing to 15% by 

2020, applying simple assumptions. 

In scenarios S1L, S1H and S3H environmental tax revenues are recycled 

through reductions in income tax rates and social security contributions in each of 

the member states, such that there is no direct change in tax revenues. In scenario 

S2H 10% of the environmental tax revenues are recycled through spending on 

eco-innovation measures, the remaining 90% is recycled through the same 

measures as in the other scenarios. The eco-innovation spending is split across 

power generation and housing according to tax revenues from the corporate and 

household sector. In GINFORS the share of renewables in electricity production is 

increased due to the additional investment. The rest of additional investment goes 

to household energy efficiency spending. Investment needed for a certain amount 

of renewables increase or efficiency improvement is based on German and 

Austrian experience (Lehr et al. 2008, 2009; Grossmann et al. 2008; Lutz and 

Meyer 2008). This assumption is quite conservative as parameters for other countries 

can be assumed to be more positive. Less money will be needed for renewables 

installation or energy efficiency gains due to technical progress than in first mover 

countries. 

In scenarios S1L and S1H the 20% GHG target translates into a 15% reduction of 

energy-related carbon emissions against 1990 as other emissions such as methane 

and nitrous oxide already have been reduced above average. The target is reached by 

a tightened EU ETS cap and the introduction of a carbon tax on the non-ETS sector. 

The tax rate applied is equal to the carbon price in the EU ETS that will deliver 20% 

reduction in GHG by 2020. 

The carbon tax is levied on energy outputs, i.e. the final use of energy, and will be 

based on the carbon content of each fuel. Carbon prices are assumed to be fully 

passed on to consumers. All carbon taxes will be in addition to any existing 

unilateral carbon taxes and excise duties. The carbon reductions in the different EU 

Member States (MS) will be those that the same carbon tax increase across the EU 

produces. 

One hundred percent of the revenues, including EU ETS auctioning revenues, 

carbon tax revenues and material tax revenues will be recycled. The proportion of 

tax raised by industry will be recycled into a reduction in employers’ social security 

contributions, which will in turn reduce the cost of labour. Recycling will be 

additional to the existing ETRs in some member states. Revenues raised from 

households will be recycled through standard rate income tax reductions. Traditional 

energy tax revenues will be lower compared to the respective baseline, as the tax 

base (energy consumption) is reduced. So revenue-neutrality does not mean budgetneutrality 

of an ETR. 

Scenario S3H is used to investigate the effect that international cooperation would 

have on competitiveness and resources. In this scenario it is assumed that the rest of 

the world takes equivalent action towards reducing carbon emissions. International 

action is expected to reduce the loss of competitiveness the EU would face if it 

embarked on unilateral action. However, in this scenario, the tax levied is greater and

348 C. Lutz 

is designed to reduce greenhouse gas emissions by 30% in 2020, rather than 20% in 

the preceding scenarios. 

Scenario S3H is leaned on scenario S1H but with higher targets in line with the 

EU’s stated policy objective of a 30% GHG reduction against 1990 until 2020. In 

GINFORS ETS and ETR is modelled in the major OECD countries. CO2 prices in 

these countries are equal to EU prices. Emerging economies will introduce a CO2 tax 

recycled via income tax reductions. CO 2 tax rates will be 25% of EU (OECD) prices 

in 2020. Restricted participation of emerging economies takes into account common 

but differentiated responsibility (lower historic burden, lower GDP per capita). The 

relation of 25% is based on calculations in a post-Kyoto project for the German 

Ministry of Economy in 2007 (Lutz and Meyer 2009b). The 30% reduction will be 

in European emissions, without trying to take account of JI/CDM transactions that 

could be on top of the extra EU carbon reduction. 

4 Baseline BL 

The reference scenario (baseline) BL bases population development, economic 

growth, energy consumption and emission development on national and international 

projections, in particular on the reference scenario of the PRIMES model (DG 

TREN 2008) and of the reference scenario of the World Energy Outlook 2008 

published by the IEA (2008). According to this, the world population will increase 

to above 8 billion by 2030. The world economy will grow considerably driven by 

the economic development in the developing countries. Mitigation efforts are not 

increased world wide. 

The current economic crisis is not taken into account. If EU (and global) GDP are 

substantially lower in 2020 than expected in 2008, the carbon price and related 

economic impacts to reach fixed targets will also be lower. 

Global energy-related CO2 emissions increase by 50% until 2030 compared to 

2005 without additional mitigation measures. Compared to the base year of the 

Kyoto Protocol, 1990, they almost double. The EU-27 will still produce about 10% 

of global emissions in 2030 (15% in 2004). The main increase of global emissions 

can be ascribed to developing and emerging countries-particularly to China, which 

already is the world’s biggest CO2 emitter-for which there are no emission 

reduction targets set in the Kyoto Protocol. But emissions will also increase 

substantially in the USA and Russia, and the rest of the world, particularly in the 

OPEC countries. 

Figure 2 clearly indicates that EU-27 is only a minor player in global emissions. 

Even if EU-27 and all developed countries together cut their emissions to zero in 

2020, the 2° target cannot be reached without additional reductions in other parts of 

the world (see also IEA 2008, 2009). 

The shift in global material extraction and production patterns is underpinned 

by Fig. 3, which shows that shares of EU-25 and other OECD countries will 

decrease sharply after 2005 to less than 30% in 2030. At the same time the 

emerging BRICS countries and especially the rest of the world will raise their 

share in global extraction. Overall extractionwillstronglyincreaseinthenext 

decades (Fig. 4).


45,000 

40,000 

35,000 

30,000 

25,000 

20,000 

15,000 

10,000 

5,000 

5 Overview of modelling results 

This chapter summarizes detailed results for the EU level presented in Lutz and 

Meyer (2009a) for the EU part and in Giljum et al. (2010) for the global 

implications. The main results of the simulations are highlighted in Table 1. High 

energy price scenarios are in the centre of the discussion. They are close to medium 

and long-term price expectations of the IEA (2008). In the baseline scenario BH with 

high energy prices, EU-27 carbon emissions will be 7.2% below 1990 level in 2020. 

EU-15 has committed in the Kyoto protocol to reduce its GHG emissions 8% below 

1990 levels in the period 2008–2012. As emissions in the new member states are 

substantially below their 1990 levels today, EU-27 will keep its emissions more or 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

0 

Rest of World 

G5 

other developed countries 

EU-27 

1990 2005 2010 2015 2020 2025 2030 

Fig. 2 Energy-related CO2 emissions in Mt CO2 

2000 2005 2010 2020 2030 

EU-25 Rest of OECD BRICS RoW 

Fig. 3 Global used material extraction for country groups

350 C. Lutz 

120 

100 

80 

60 

40 

20 

0 

Construction minerals 

Indus trial minerals 

Non-ferrous metals 

Iron ores 

Natural Gas 

Crude Oil 

Coal 

Forestry products 

Agricultural produc ts and fish 

2000 2005 2010 2020 2030 

Fig. 4 Global used material extraction in billion tonnes 

less constant over the coming decade. As in the PRIMES baseline an ETS price of 

18 Euro/t CO 2 in 2008 prices is assumed in 2020. 

In scenario S1H the ETS price and carbon tax rate has to be increased to 68 

Euro2008/t of CO2 to reach the 20% GHG reduction target, which is equal to a 15% 

reduction of CO2 emissions against 1990 as other greenhouse gases (GHG) have 

already been reduced above average. Compared to the baseline, CO2 emissions are 

8.4% lower in 2020 which means an additional 1% p.a. reduction in the period 2012 

to 2020. GDP will be about 0.6% lower compared to the baseline in 2020. This 

means that annual average growth rates will be less than 0.1% below their baseline 

development. As the recycling mechanism reduces labour costs and the tax burden is 

shifted from labour-intensive to carbon-and material-intensive sectors employment 

will be 0.36% (or more than 800.000 jobs) higher than in the baseline. The ETR is 

not fully budget-neutral for the EU economies that can slightly increase their net 

savings. If this extra saving is spent, negative GDP impacts will be further reduced. 

Table 1 Main results in the different scenarios for 2020 

Scenario Target CO2 price 

in €2008 

GDP against 

baseline in % 

Employment 

against baseline 

in % 

CO2 reduction 

against 1990 

in % 

CO2 reduction 

against baseline 

in % 

BH – 18 – – −7.2 0.0 

S1H 20% GHG 68 −0.6 0.36 −15.1 −8.4 

S2H 20% GHG 61 −0.3 0.42 −15.2 −8.5 

S3H 30% GHG 184 −1.9 0.77 −25.0 −19.1 

BL – 18 – – 2.8 10.9 

S1L 20% GHG 120 −3.0 0.02 −14.9 −17.2


In a world of low energy prices it will be much more difficult to reach the EU 

GHG target. The carbon price will have to reach 120 Euro2008/t in 2020 in scenario 

S1L. The GDP loss against the baseline with low energy prices will be 3%. Energy, 

material and carbon productivity increases will not much improve EU competitiveness 

on international markets, which is reduced as EU prices increase in relation to 

NON-EU competitors. The comparison of scenarios S1L and S1H to their respective 

baseline demonstrates the importance of international energy prices for fixed volume 

(emission) targets. 

If part of the revenues is used for investment in low-carbon technologies, the 

carbon price in scenario S2H can even be lower (61 Euro2008/t in 2020) and the 

GDP loss halved against scenario S1H to only 0.3%, as the investment in renewable 

energies is assumed to be additional. Employment impacts will be more positive 

than in scenario S1H. The 10% investment in low-carbon technologies will amount 

to more than 20 Bill. Euro in 2020. 

The EU-Commission (2008) impact assessment reports macroeconomic costs of 

0.58% of EU GDP in 2020 to reach the GHG and RES targets in a cost-efficient 

scenario. A carbon price of 39 Euro/t and an additional renewable energy incentive 

of 4.5 Cent/kWh will be needed in a scenario of low energy prices. Employment 

impacts are slightly negative. In a sensitivity analysis of the impact assessment with 

higher energy prices, GDP reduction is only 0.4%. The higher carbon price in 

GINFORS compared to the EU impact assessment is mainly due to the scenario 

assumptions, that the carbon price is the only policy instrument, whereas the EU 

implicitly takes efficiency measures and explicitly additional fostering of renewables 

into account. 

If EU-27 wants to reach its 30% reduction target (i.e. a 25% carbon reduction 

against 1990) within an international agreement only by domestic measures, the 

carbon price in scenario S3H will have to be 184 Euro/t in 2020 (and 46 Euro/t in 

the major emerging economies). The E3ME model, also applied in the study, even 

reports a carbon price of 204 Euro/t for the same scenario. Again, these high prices 

result as the carbon price is the only policy instrument and reductions are completely 

in domestic emissions. Other studies not only with GINFORS suggest that EU will 

be better off, if it purchases part of the emission reductions on global carbon 

markets. The IEA (2008) reports a global price of carbon of 180 US-Dollar in 2030 

to reach the 450 ppm stabilization, which is in line with scenario S3H. GDP 

reduction in the EU-27 against the baseline will be 1.9% in 2020, partly due to 

lower international trade and production in other parts of the world. Employment 

will be 0.77% higher than in the baseline. Scenario S2H clearly shows that a policy 

mix, including fostering of renewable energies and energy efficiency measures, 

could further decrease the negative impacts on production and jobs. Negative GDP 

impacts above average in NON-OECD countries as China and Russia underpin their 

demand for technology and financial transfers as part of a global post-Kyoto 

agreement. 

EU energy, carbon and material productivity will improve in scenarios S1H, S2H 

and S3H against the baseline (see Table 2). Labour productivity will decrease mainly 

due to the structural shift from energy-and carbon-intensive to labour-intensive 

industries. The increase in carbon productivity is higher than in energy productivity 

due to the shift towards low carbon energy carriers.

352 C. Lutz 

Table 2 EU27 productivity: percentage deviations against respective baselines in 2020 

Scenario Material Productivity Energy Productivity Labour Productivity Carbon Productivity 

S1H 0.91 6.04 −0.93 8.59 

S2H 0.84 7.15 −0.71 8.99 

S3H 1.78 15.48 −2.61 21.35 

S1L 1.97 12.21 −3.02 17.17 

The scenarios do not take specific policy measures into account to reach the EU 

renewables target of a 20% renewables share in final energy consumption in 2020. 

But the share will increase from around 10% today to above 14% even in the 

baseline with low energy prices as instruments such as feed in tariffs and bio fuel 

quotas will continue. In scenario S1H the target will be missed with around 18% in 

2020. Only in scenarios S2H (almost 20%) and S3H (22%), the target is met without 

explicit policy efforts. 

On the global level, EU action plays only a minor role. According to Fig. 5 the 

level of international energy prices on the one hand and the participation of the 

major emitters on the other hand is much more important for the global emission 

path. The EU can mainly give an example that a low-carbon society can be reached. 

An additional argument for mitigation efforts may be that even unilateral EU action 

could increase employment in the EU, although GDP and employment impacts will 

even be better in the case of international cooperation (Lutz and Meyer 2009b). 

Figure 6 illustrates that global material extraction continues to grow in all three 

scenarios. With less than 0.1% reduction, the world-wide effects of the measures 

implemented in scenario S1H are negligible. S3H measures lead to a decrease of 

5.3% compared to the baseline, but overall levels of extraction still continue to grow. 

Throughout the scenarios, the group of emerging economies largely determines the 

overall growth trend. Brazil is expected to experience the strongest growth in 

40 

36 

32 

28 

24 

20 

BL 

BH 

S1H 

S3H 

1990 2005 2010 2015 2020 

Fig. 5 Global energy-related CO2 emissions in Mt CO2 in different scenarios


90 

80 

70 

60 

50 

BH 

S1H 

S3H 

2000 2005 2010 2015 2020 

Fig. 6 Global used material extraction in billion tonnes, three scenarios 

material extraction, especially iron ore, due to large amounts of available resources, 

agricultural and forestry products and construction materials. 

Figure 7 highlights the GDP impacts of GHG emission reductions in the EU in 

relation to high and low energy prices. The impact of high energy prices on GDP 

(baseline BH against baseline with low energy prices BL) is about as important as 

the impact of GHG emissions reduction in scenario S1L (with low energy prices) 

against the respective baseline BL in 2020. In the case of high energy prices, the 

impact of GHG emission reduction (Scenario S1H against the baseline BH) is much 

lower. The macroeconomic costs of reaching emission reductions strongly depend on 

the future level of international energy prices, as the value of saved energy imports is 

determined by international energy prices. The positive impact of higher energy 

productivity on international competitiveness also depends on energy price levels. 

It is remarkable that the 20% GHG target in S1L in the case of low energy prices 

and unilateral EU action creates more negative GDP impacts than the 30% GHG 

reduction in the case of high energy prices and international cooperation. 

In contrast to production, employment increases in all scenarios. Due to the 

scenario design the structure of the EU economies is shifted from carbon-and 

15,000 

14,500 

14,000 

13,500 

13,000 

12,500 

12,000 

11,500 

11,000 

BH 

BL 

S1L 

S1H 

2010 2015 2020 

Fig. 7 GDP of EU-27 in Bill. US-Dollars (PPPs) in prices of 2005 in different scenarios

354 C. Lutz 

material-intensive to labour-intensive sectors. The magnitude of the employment 

gain is influenced by the carbon price and the tax shift, the underlying energy prices 

and the production loss. 

The CO2 reduction is mainly reached by a reduction of energy consumption, as 

substitution options are limited in the medium term. Substitution accounts for about 

one quarter of the emission reduction until 2020. Especially in the power sector, but 

also in transport and energy-intensive industries as iron and steel substitution of 

energy carriers depends on long-term investment cycles and capital stock turnover. 

The IEA (2008, p.75) reports typical lifetimes of energy-related capital stock of up to 

two decades for passenger cars and about 50 years for nuclear and coal power plants. 

The share of substitution of energy carriers, especially towards zero-emission energy 

use, is expected to increase in the long-term after 2020. On sector level, highest 

reductions in energy consumption take place in scenario S1H in iron and steel, 

chemicals, non-metallic minerals and mining and quarrying. 

6 Conclusions 

In the course of the petrE project the GINFORS model has been applied to assess 

economic and environmental impacts of ETS and ETR to reach the EU GHG targets 

in the EU in 2020. Results show positive employment effects and only small 

negative impacts on GDP. Economic impacts depend on the level of international 

energy prices, the recycling mechanism, country specifics such as carbon and energy 

intensity and structure of energy consumption. 

In comparison to the results of the E3ME model (Pollitt and Chewpreecha 2009) 

GINFORS is less optimistic on the economic results. One important reason is the 

explicit modelling of international trade. In the case of unilateral EU action, 

competitiveness of EU economies will decrease and other economies will not be 

interested in new low-carbon technologies. If international cooperation is reached 

later in 2010, international competitiveness could even be an advantage of EU 

companies. But as global GDP will be around 1% lower, in line with figures from 

the Stern (2007) review or the IPCC (2008), and transport costs will increase, overall 

EU exports will also be reduced. 

As every reform a major ETR in Europe will create winners and losers. On a 

sector level, carbon and material-intensive industries will have to face economic 

loss. On a country level, carbon-intensity but also the overall flexibility of 

economies is quite important. International cooperation will reduce economic 

pressure on countries and sectors, although structural change away from the 

carbon-intensive industries, together with technological change, is inherent to any 

successful climate mitigation policy. 

ETR and ETS, if allowances are fully auctioned, are additional sources of public 

revenues. The discussion on grandfathering vs. auctioning of ETS allowances 

should be directed more towards this point. Countries, which give allowances away 

for free, will lack money to ease structural change and invest in low-carbon 

technologies. 

Results should be carefully related to the EU policy debate. The project did not 

search for a cost-minimal strategy. In the model simulations the single carbon price


is the only instrument to reach the EU 2020 GHG targets. Renewables and efficiency 

policies will also contribute to carbon reduction and have to be taken into account, 

when comparing the results (especially the high carbon prices) to other studies. 

There are different renewables and efficiency policies that could further improve the 

economic impacts of reaching the climate and energy targets. The results clearly 

indicate to intensify the discussion on market-based instruments, but in the end a 

policy mix will be needed to reach the EU GHG targets. 

Global material extraction and energy-related CO 2 emissions continue to grow in 

all three scenarios analysed in GINFORS. This trend is largely led by the group of 

emerging economies. The worldwide effects of the unilateral ETR scenario (S1H) on 

the growth trend of used material extraction and energy-related CO2 emissions are 

negligible. For both impacts, the cooperation scenario (S3H) is more effective. It 

would decrease the global amount of materials extracted by 5.3% and the amount of 

CO2 emissions by 15.6% compared to the baseline scenario in 2020. 

Two main policy conclusions can be drawn from this investigation. First, 

combating climate change can only be successful through global cooperation and 

global climate treaties. Carbon prices may be significantly higher than in the current 

European debate or additional non-price measures have to be used. Secondly, since 

overall resource use is continuing to increase substantially, targets on CO2 emissions 

only are not sufficient in order to lessen the environmental impacts of economic 

activities. The just beginning debate about limits of resource extraction will raise 

similar questions about international competitiveness and leakage, GDP effects and 

the need of international action as the climate change debate. 

This calls for new research efforts especially on the global scale. Even though 

more and more internationally comparable data becomes available, the field clearly 

lacks fundamental data and research structures, that had been established for energy 

in the 1970s as a response two the first oil price crisis. New research in the field of 

externalities such as the EU FP 6 EXIOPOL project will deliver additional empirical 

data, that will further improve the analysis to more explicitly take capacity 

constraints into account. 

Combined with environmentally extended multi-regional input-output models 

such as GRAM (Giljum et al. 2008b), results can substantially improve the 

understanding of consumer and producer responsibility in the light of upcoming 

international agreements. 

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Cambridge


DOI 10.1007/s10368-010-0171-y 


Eco-innovation for enabling resource efficiency 

and green growth: development of an analytical 

framework and preliminary analysis of industry 

and policy practices 

Tomoo Machiba 



Abstract In order to meet great environmental challenges including climate change, 

more attention needs to be paid to innovation as a way to develop and realise sustainable 

solutions. This paper reviews the existing understanding of “eco-innovation” and 

proposes a framework that defines this concept from three aspects—target, mechanism 

and impact. The proposed framework is also applied to understand the evolution of 

corporate activities for sustainable production and analyse some good practices. Ecoinnovation 

activities are very diverse and are occurring at different levels and scales. 

Although the primary focus of corporate practices tends to be on technological 

advances, some advanced industry players have adopted complementary organisational 

or institutional changes such as new business models and alternative modes of 

provision. It is therefore essential to capture both incremental and systemic (or radical) 

types of eco-innovation unlike most empirical research in this area. 

1 Introduction: green growth emerged as new policy crossroads 

In June 2009, the OECD Council Meeting at Ministerial Level (MCM) adopted a 

Declaration on Green Growth (OECD 2009a). The declaration invited the OECD to 

develop a Green Growth Strategy to achieve economic recovery and environmentally 

and socially sustainable economic growth. 1 The MCM Declaration broadly 

defines “green growth policies” as policies encouraging green investment in order to 

simultaneously contribute to economic recovery in the short term and help to build 

the environmentally friendly infrastructure required for a green economy in the long 

term. In terms of resource economics, such policies firstly need to guide industry to 

delink environmental degradation from economic or sales growth by reducing 

resource use per unit of value added (relative decoupling). At the same time, it 

would be essential to aim at further efforts towards achieving absolute reductions in 

the use of energy and materials to a sustainable level (absolute decoupling). 

1 For the latest development on the OECD Green Growth Strategy, see www.oecd.org/greengrowth. 

T. Machiba (*) 

Senior Policy Analyst, Green Growth & Eco-innovation, Directorate for Science, Technology and 

Industry, OECD, 2 rue André-Pascal, Paris, 75775 Cedex 16, France

358 T. Machiba 

While industries are showing greater interest in sustainable production and are 

undertaking a number of corporate social responsibility (CSR) initiatives during the 

last decade, progress falls far short of meeting the pressing global challenges such as 

climate change, energy security and depletion of natural resources. Moreover, 

improvements in efficiency have often been offset by increasing consumption and 

outsourcing, while efficiency gains in some areas are outpaced by scale effects. 

Without new policy action, recent OECD analysis suggests that global greenhouse 

gas (GHG) emissions are likely to increase by 70% by 2050, whilst the G8 leaders 

agreed to aim for halving global emissions during the same period (OECD 2009b). 

The political and economic challenges for OECD countries are daunting. 

Incremental improvement is not enough to meet such challenges. Industry must be 

restructured and existing and breakthrough technologies must be more innovatively 

applied to realise green growth. The OECD Directorate for Science, Technology and 

Industry (DSTI) is thus aiming to contribute to the development of the OECD Green 

Growth Strategy from a viewpoint of promoting the role of innovation for realising 

green growth and has been conducting a project on Green Growth and Eco-innovation 

since 2008. 2 Raising efficiency in resource and energy use and engaging in a broad 

range of innovations to improve environmental performance will help to create new 

industries and jobs in coming years. The current economic crisis and negotiations to 

tackle climate change should be seen as an opportunity to shift to a greener economy. 

This paper presents part of the outcomes from the first phase of this OECD 

project, which took stock of the existing research and industry and policy practices 

and attempted to develop a conceptual framework for common understanding and 

further analysis. Firstly, the paper reviews the existing understanding of ecoinnovation 

and propose a framework that defines the concept from three aspects. 

Secondly, the framework is applied to understand the evolution of corporate 

activities for sustainable production and analyse some good practices. Lastly, the 

paper envisions the potential of diverse approaches of eco-innovation captured by 

the framework with a particular emphasis on the role of systemic or radical 

innovation, and concludes by outlining the next phase of the OECD project that is 

planned for further in-depth understanding an advanced policy support. 

2 Defining the role of eco-innovation for green growth 

Much attention has recently been paid to innovation as a way for industry and 

policy makers to achieve more radical improvements in corporate environmental 

practices and performance. Many companies have started to use eco-innovation or 

similar terms to describe their contributions to sustainable development. A few 

governments are also promoting the concept as a way to meet sustainable 

development targets while keeping industry and the economy competitive. However, 

while the promotion of eco-innovation by industry and government involves the 

pursuit of both economic and environmental sustainability, the scope and application 

of the concept tend to differ. 

2 

For more details on the OECD project on Green Growth and Eco-innovation, see www.oecd.org/sti/ 

innovation/sustainablemanufacturing.

Eco-innovation for enabling resource efficiency and green growth 359 

In the European Union (EU), eco-innovation is considered to support the wider 

objectives of its Lisbon Strategy for competitiveness and economic growth. The 

concept is promoted primarily through the Environmental Technology Action Plan 

(ETAP), which defines eco-innovation as “the production, assimilation or exploitation 

of a novelty in products, production processes, services or in management and 

business methods, which aims, throughout its lifecycle, to prevent or substantially 

reduce environmental risk, pollution and other negative impacts of resource use 

(including energy)”. 3 Environmental technologies are also considered to have 

promise for improving environmental conditions without impeding economic growth 

in the United States, where they are promoted through various public-private 

partnership programmes and tax credits (OECD 2008). 

To date, the promotion of eco-innovation has focused mainly on environmental 

technologies, but there is a tendency to broaden the scope of the concept. In Japan, the 

government’s Industrial Science Technology Policy Committee defined eco-innovation 

as “a new field of techno-social innovations [that] focuses less on products’ functions 

and more on [the] environment and people” (METI 2007). Eco-innovation is thus seen 

as an overarching concept which provides direction and vision for pursuing the overall 

societal changes needed to achieve sustainable development (Fig. 1). 

The OECD is primarily studying innovation based on the OECD/Eurostat Oslo 

Manual for the collection and interpretation of innovation data. This manual 

describes innovation as “the implementation of a new or significantly improved 

product (good or service), or process, a new marketing method, or a new 

organisational method in business practices, workplace organisation or external 

relations” (OECD and Eurostat 2005, p. 46). This provides a good overview on 

where innovation occurs beyond technology spheres but does not shed enough lights 

on how it occurs and what it is developed for, which are essential to understand the 

nature of eco-innovation as it particularly concerns the scope of changes and the 

impact the changes can create for improving environmental conditions. Charter and 

Clark (2007, p. 10) provides an alternative useful classification of eco-innovation 

based on the levels of making differences from the existing state as below: 

& Level 1 (incremental): Incremental or small, progressive improvements to 

existing products 

& Level 2 (re-design or ‘green limits’): Major re-design of existing products (but 

limited the level of improvement that is technically feasible) 

& Level 3 (functional or ‘product alternatives’): New product or service concepts to 

satisfy the same functional need, e.g. teleconferencing as an alternative to travel 

& Level 4 (systems): Design for a sustainable society 

In addition to the above two aspects, the concept of eco-innovation entails two 

other significant, distinguishing characteristics from that of ordinary innovation: 

& Eco-innovation includes both environmentally motivated innovations and 

unintended environmental innovations. The environmental benefits of an 

3 The EU is discussing the renewal of the ETAP as the Eco-Innovation Action Plan from 2011. The new 

plan will reflect the extension of the eco-innovation concept by embracing non-technological aspects of 

eco-innovation such as innovation in business models and increasing attention to the diffusion and 

commercialisation stages of eco-innovation on top of research and development.


Field 

Target 

Technology 

Business 

model 

Societal 

system 

(institution) 

Sustainable 

manufacturing 

Innovative R&D 

(energy saving, 

etc.) 

Green procurement 

including BtoB 

EMA 

LCA 

Environmental 

labeling system 

Starmark 

Green investment 

Industry 

Manufacturing Service 

Rare metal recycling 

Green servicizing 

Green ICT 


Building Energy 

Management 

System 

Energy services 

Environmental 

rating/green 

finance 

Source: Ministry of Economy, Trade and Industry (METI), Japan. 

Fig. 1 The scope of Japan’s eco-innovation concept 

Social infrastructure Personal 

lifestyle 

Energy Transportation / 

urban 


renewable 

energy, batteries· 

Superconducting 

transmission 

Green certification 

Top Runner 

Programme 

PRS Act 

(Renewables 

Portfolio Standard) 


(intelligent transport 

systems) 

Green automobiles 

Next-generation 

vehicle and fuel 

initiative (METI) 

Heat pump 

innovation may be a side effect of other goals such as reducing costs for 

production or waste management (MERIT et al. 2008). In short, eco-innovation 

is essentially innovation that reflects the concept’s explicit emphasis on a 

reduction of environmental impact, whether such an effect is intended or not. 

& Eco-innovation should not be limited to innovation in products, processes, 

marketing methods and organisational methods, but also includes innovation in 

social and institutional structures (Rennings 2000; Reid and Miedzinski 2008). 

Eco-innovation and its environmental benefits go beyond the conventional 

organisational boundaries of the innovator to enter the broader societal context 

through changes in social norms, cultural values and institutional structures. 

Synthesising the above considerations, the OECD project proposes that ecoinnovation 

can be understood and analysed from three dimensions, namely in terms 

of an innovation’s 1) target, 2) mechanism and 3) impact. Figure 2 presents an 

overview of eco-innovation and its typology: 

1) Target refers to the basic focus of eco-innovation. Following the OECD/ 

Eurostat Oslo Manual, the target of an eco-innovation may be: 

a. Products, involving both goods and services. 

b. Processes, such as a production method or procedure. 

c. Marketing methods, for the promotion and pricing of products, and other 

market-oriented strategies. 

Maglev 

Modal shift 

Green tax for 

automobiles 

Green procurement 

Cool biz 

Green finance 

Telework, 

telecommuting 

Work-life balance


Eco-innovation targets 

Institutions 

Organisations 

& 

Marketing 

methods 

Processes 

& 

Products 

Fig. 2 A proposed framework of eco-innovation 

Primarily 

non-technological change 

Primarily 

technological change 

Higher 

potential 

environmental 

benefits… 

…but more 

difficult to 

co-ordinate 

Modification Redesign Alternatives Creation 

Eco-innovation mechanisms 

d. Organisations, such as the structure of management and the distribution of 

responsibilities. 

e. Institutions, which include the broader societal area beyond a single organisation’s 

control, such as institutional arrangements, social norms and cultural values. 

The target of the eco-innovation can be technological or non-technological in 

nature. Eco-innovation in products and processes tends to rely heavily on 

technological development; eco-innovation in marketing, organisations and institutions 

relies more on non-technological changes (OECD 2007). 

2) Mechanism relates to the method by which the change in the eco-innovation 

target takes place or is introduced. It is also associated with the underlying 

nature of the eco-innovation—whether the change is of a technological or nontechnological 

character. Four basic mechanisms are identified: 

a. Modification, such as small, progressive product and process adjustments. 

b. Re-design, referring to significant changes in existing products, processes, 

organisational structures, etc. 

c. Alternatives, such as the introduction of goods and services that can fulfil 

the same functional need and operate as substitutes for other products. 

d. Creation, the design and introduction of entirely new products, processes, 

procedures, organisations and institutions. 

3) Impact refers to the eco-innovation’s effect on the environment, across its 

lifecycle or some other focus area. Potential environmental impacts stem from 

the eco-innovation’s target and mechanism and their interplay with its sociotechnical 

surroundings. Given a specific target, the potential magnitude of the 

environmental benefit tends to depend on the eco-innovation’s mechanism, as 

more systemic changes, such as alternatives and creation, generally embody 

higher potential benefits than modification and re-design.


3 Understanding sustainable manufacturing practices from the eco-innovation 

perspective 

Industries have traditionally addressed pollution concerns at the point of discharge. 

Since this end-of-pipe approach is often costly and ineffective, industry has 

increasingly adopted cleaner production by reducing the amount of energy and 

materials used in the production process. Many firms are now considering the 

environmental impact throughout the product’s lifecycle and are integrating 

environmental strategies and practices into their own management systems. Some 

pioneers have been working to establish a closed-loop production system that 

eliminates final disposal by recovering wastes and turning them into new resources 

for production, as exemplified in remanufacturing practices and eco-industrial parks. 

This evolution of such sustainable manufacturing initiatives can be viewed as 

facilitated by eco-innovation and classified according to the dimensions proposed in 

the previous section. Figure 3 provides a simple illustration of the general conceptual 

relations between sustainable manufacturing and eco-innovation. The steps in 

sustainable manufacturing are depicted in terms of their primary association with 

respect to eco-innovation facets. While more integrated sustainable manufacturing 

initiatives such as closed-loop production can potentially yield higher environmental 

improvements in the medium to long term, they can only be realised through a 

combination of a wider range of innovation targets and mechanisms and therefore 

cover a larger area of this figure. 

For instance, an eco-industrial park cannot be successfully established simply by 

locating manufacturing plants in the same space in the absence of technologies or 

procedures for exchanging resources. In fact, process modification, product design, 

alternative business models and the creation of new procedures and organisational 

arrangements need to go hand in hand to leverage the economic and environmental 

benefits of such initiatives. This implies that as sustainable manufacturing initiatives 

advance, the nature of the eco-innovation process becomes increasingly complex and 

more difficult to co-ordinate. 

Fig. 3 Conceptual relationships between sustainable manufacturing and eco-innovation


Table 1 Eco-innovation examples examined through the eco-innovation framework 

Industry and company/association Eco-innovation example 

Automotive and transport industry 

The BMW group Improving energy efficiency of automobiles 

Toyota Sustainable plants 

Michelin Energy saving tyres 

Velib’ 

Iron and steel industry 

Self-service bike sharing system 

Siemens VAI, etc. Alternative iron-making processes 

ULSAB-AVC 

Electronics industry 

Advances high-strength steel for automobiles 

IBM Energy efficiency in data centres 

Yokogawa Electric Energy-saving controller for air conditioning water pumps 

Sharp Enhancing recycling of electronic appliances 

Xerox Managed print services 

OECD 2010 

These complex, advanced eco-innovation processes can power possible “system 

innovation”—i.e. innovation characterised by fundamental shifts in how society 

functions and how its needs are met (Geels 2005). Although system innovation may 

have its source in technological advances, technology alone cannot make a great 

difference. It has to be associated with organisational and social structures and with 

human nature and cultural values. While this may indicate the difficulty of achieving 

large-scale environmental improvements, it also hints at the need for manufacturing 

industries to adopt an approach that aims to integrate the various elements of the 

eco-innovation process so as to leverage the maximum environmental benefits. The 

feasibility of their eco-innovative approach would depend on the organisation’s 

ability to engage in such complex processes. 

4 Applying the eco-innovation framework for good practices 

To better understand current applications of eco-innovation in manufacturing 

industries, a small sample of sector-specific examples were reviewed in light of 

the above framework. Examples from three sectors chosen for this preliminary 

review: a) the automotive and transport industry; b) the iron and steel industry; and 

c) the electronics industry. The examples draw mainly on the interaction with 

industry practitioners made during the first phase of the OECD project (Table 1). 

The examples are not meant to represent “best practices” but were selected to 

illustrate the diversity of eco-innovation, its processes and the different contexts of 

its realisation. 4 Following is an overview of the examination of each sector’s general 

practices and examples according to the proposed eco-innovation framework. A few 

notable examples are illustrated in boxes. 

4 For detailed information on each example, see OECD (2010).


The automotive and transport industry is taking steps to reduce CO2 emissions 

and other environmental impacts, notably those associated with fossil fuel 

combustion. Combined with the growing demand for mobility, particularly in 

developing economies, many eco-innovation initiatives have focused on increasing 

the overall energy efficiency of automobiles and transport, while heightening 

automobile safety. Eco-innovations have, for the most part, been realised through 

technological advances, typically in the form of product or process modification and 

re-design, such as more efficient fuel injection technologies, better power 

management systems, energy-saving tyres and optimisation of painting processes. 

Yet, there are indications that the understanding of eco-innovation in this sector is 

broadening. Alternative business models and modes of transport such as the bicycle– 

sharing scheme in Paris (Box 1) are being explored, as are new ways of dealing with 

pollutants from manufacturing processes of automobiles. 

The iron and steel industry has in recent years substantially increased its 

environmental performance through a number of energy-saving modifications and 

the re-design of various production processes. These have often been driven by 

In an attempt to reduce traffic congestion and improve air quality, the City of Paris introduced a selfservice 

bicycle-sharing system Vélib’ in the summer of 2007. The system consists of some 

1 750 stations located in conjunction with metro and bus stations and open 24 hours a day year 

round, each containing 20 or more bike spaces. This amounts to about one station every 300 metres 

throughout the inner city, with a total of 23 900 bicycles and 40 000 bicycle racks. 

Each station is equipped with an automatic rental terminal at which people can hire a bicycle through 

different subscription options. Subscriptions can be purchased for a small fee by the day, week or 

year and can be linked to the “swipe and 

enter” Navigo card used for the city’s metro 

and bus system. 

A subscription allows the user to pick up a 

bicycle from any station in the city and use it at 

no charge for 30 minutes. After that a charge 

is incurred for additional time in periods of 30 

minutes. The payment scheme was designed 

to keep bicycles in constant circulation and 

increase intensity of use. To facilitate 

circulation, bicycles are redistributed every 

night to stations which have particularly high 

demand. Real-time data on bicycle availability 

at every station is provided through the 

Internet and is also accessible via mobile 

phones. 

The start-up financing for the Vélib’ project, as well as full-time operation for 10 years and associated 

costs, was undertaken entirely by the JC Decaux advertising company. In return, the City of Paris 

transferred full control of a substantial portion of the city’s advertising billboards to this company. 

The Vélib’ system has been considered as a great success and taking bicycles is also becoming 

fashionable. Part of this success is due to the system’s design, with its strong focus on flexibility, 

availability and, not least, ease of use. By October 2009, the number of annual subscribers has 

reached 147 000, and between 65 000 and 150 000 trips are being made each day. The system was 

extended to 30 neighbour boroughs in the suburbs by the summer 2009. Building on this success, the 

city is now planning to expand the project with about 4 000 self-service electric hire cars (named 

Autolib’) by the beginning of 2011. 

Box 1 Vélib’: Self-service bicycle-sharing system in Paris


strong external pressures to reduce pollution and by increases in the prices and 

scarcity of raw materials. While most of the industry’s eco-innovative initiatives 

have focused on technological product and process advances, the industry’s 

engagement in various institutional arrangements has laid the foundation for many 

of these developments. For example, the development of advanced high-strength 

steel was made possible through an international collaborative arrangement between 

vehicle designers and steel makers and enabled the production of stronger steel for 

the manufacturing of lighter and more energy-efficient automobiles (Box 2). 

The electronics industry has so far mostly been concerned with eco-innovation in 

terms of the energy consumption of its products. However, as consumption of 

electronic equipment continues to grow, companies are also seeking more efficient 

ways to deal with the disposal of their products. As in the other two sectors, most 

eco-innovations in this industry have focused on technological advances in the form 

of product or process modification and re-design. Similarly, developments in these 

areas have been built upon eco-innovative organisational and institutional arrangements 

(see Box 3). Some of these arrangements have also been, perhaps 

unsurprisingly, among the most innovative and forward-looking. A notable example 

is the use of large-scale Internet discussion groups, dubbed “innovation jams” by 

IBM, to harness the innovative ideas and knowledge of thousands of people. 

Alternative business models, such as product-service solutions rather than merely 

selling physical products, have also been applied, as exemplified by new services in 

the form of energy management in data centres (IBM) and optimisation of printing 

and copying infrastructures (Xerox). 

To sum up, the primary focus of current eco-innovation in manufacturing 

industries tends to rely on technological advances, typically with products or 

processes as eco-innovation targets, and with modification or re-design as principal 

mechanisms (Fig. 4). Nevertheless, even with a strong focus on technology, a 

The introduction of new legislative requirements for motor vehicle emissions in the United States in 

1993 intensified pressures on the automotive industry to reduce the environmental impact from the 

use of automobiles. In response, a number of steelmakers from around the world joined together to 

create the Ultra-Light Steel Auto Body (ULSAB) initiative to develop stronger and lighter auto bodies. 

From this venture, the ULSAB Advanced Vehicles Concept (ULSAB-AVC) emerged. The first proofof-concept 

project for applying advanced high-strength steel (AHSS) to automobiles was conducted 

in 1999. 

By optimising the car body with AHSS at little additional cost compared to conventional steel, the 

overall weight saving could reach nearly 9% of the total weight of a typical five-passenger family car. 

It is estimated that for every 10% reduction in vehicle weight, the fuel economy is improved by 1.9- 

8.2% (World Steel Association, 2008). At the same time, the reduced weight makes it possible to 

downsize the vehicle’s power train without any loss in performance, thus leading to additional fuel 

savings. Owing to their high- and ultra-high-strength steel components, such vehicles rank high in 

terms of crash safety and require less steel for construction. 

The iron and steel industry’s continuing R&D efforts in this area also stem from its attempt to 

strengthen steel’s competitive advantage over alternatives such as aluminium. The Future Steel 

Vehicle (FSV) is the latest in the series of auto steel research initiatives. It combines global 

steelmakers with a major automotive engineering partner in order to realise safe, lightweight steel 

bodies for vehicles and reduce GHG emissions over the lifecycle of the vehicle. 

Box 2 The development of advanced high-strength steel for automobiles


Air conditioners function by driving hot or cold water through piping 

to units located on each level of the building. The amount of cold 

water varies according to the desired temperature relative to the 

outside temperature. However, conventional air conditioners operate 

at the pressure required for maximum heating and cooling demands. 

Based on research revealing that in Japan air conditioning 

consumes half of a building’s total energy, Yokogawa Electric, a 

Japanese manufacturer, sought to create a simple, inexpensive and 

low-risk control mechanism that would eliminate wasteful use of 

energy. The resulting product, Econo-Pilot, can control the pumping 

pressure of air conditioning systems in a sophisticated way and can 

reduce annual pump power consumption by up to 90%. It can be 

installed easily and inexpensively, precluding the need to buy new 

cooling equipment. The technology has been successfully applied in 

equipment factories, hospitals, hotels, supermarkets and office 

buildings. 

Image: Yokogawa Electric Corporation 

Econo-Pilot is based on the technology devised by Yokogawa jointly with Asahi Industries Co. and 

First Energy Service Company. It was developed and demonstrated through a joint research project 

with the New Energy and Industrial Technology Development Organization (NEDO), a public 

organisation established by the Japanese government to co-ordinate R&D activities of industry, 

academia and the government. NEDO researches the development of new energy and energyconservation 

technologies, and works on validation and inauguration of new technologies. After the 

demonstration and piloting of this technology, various functions were incorporated in the final 

product. 

Box 3 Energy-saving controller for air conditioning water pumps 

Institutions 

Organisations 

& 

Marketing 

methods 

Processes 

& 

Products 

Target 

Mechanism 

Yokogawa 

Econo-Pilot 

Michelin 

Energy saving 

tyres 

Sharp 

recycling of 

LCDs 

Advanced high 

strength steel 

The BMW Group 

product 

improvements by 

Efficient Dynamics 

Loremo 

Structurally redesigned 

car 

Xerox - managed 

print services 

IBM - energy 

management service 

Toyota 

photocatalytic 

paint at plants 

Corex/Finex - direct 

smelting reduction 

BMW/Toyota 

Hybrid propulsion 

Vélib’ 

bicycle sharing 

Modification Re-design Alternatives Creation 

Note: This map only indicates primary targets and mechanisms that facilitated the listed eco-innovation 

examples. Each example also involved other innovation processes with different targets and mechanisms. 

Fig. 4 Mapping primary focuses of eco-innovation examples


number of complementary changes have functioned as key drivers for these 

developments. In many of the examples, the changes have been either organisational 

or institutional in nature, such as the establishment of separate environmental 

divisions for improving environmental performance and directing R&D, or the 

setting up of inter-sectoral or multi-stakeholder collaborative research networks. 

Some industry players have also started exploring more systemic eco-innovation 

through new business models and alternative modes of provision. 

The heart of an eco-innovation cannot necessarily be represented adequately by a 

single set of target and mechanism characteristics. Instead, eco-innovation seems 

best examined and developed using an array of characteristics ranging from 

modifications to creations across products, processes, organisations and institutions. 

The characteristics of a particular eco-innovation furthermore depend on the 

observer’s perspective. The analytical framework can be considered a first step 

towards more systematic analysis of eco-innovation. 5 

5 Guiding towards systemic changes 

The above framework of eco-innovation implies diverse approaches to help realise 

resource efficiency and green growth through accelerating innovation, including 

both technological and non-technological changes. The approaches can be roughly 

categorised into incremental innovation and systemic (or radical) innovation. 

Incremental innovation primarily contributes to the relative decoupling of environmental 

impacts from economic growth, while the latter tends to have larger potential 

for helping to make absolute decoupling possible. 

Facing the great challenges of climate change and environmental degradation, it has 

to be clear to government and industry alike that incremental improvement is not enough 

to fulfil their long-term commitment. Deliberate policy interventions could bring a new 

opportunity to create new entrepreneurs, industries and jobs, but existing industries must 

be restructured and existing and breakthrough technologies must be more innovatively 

applied to secure long-term competitiveness and economic growth. In parallel to 

investing in easy short-term win-wins such as subsidising eco-friendly vehicles, today’s 

economic stimulus packages could also stimulate investments in technologies and 

infrastructures that help innovation and enable changes in the way we produce and 

consume goods and services in the long term. 

Clear benefits of more systemic innovation have been well exemplified in the 

areas of general-purpose technologies. While the information and communication 

technologies (ICTs) urgently need to raise energy efficiency in existing products 

which are responsible for around 2% of global GHG emissions, one estimate 

indicates that the transformation of the way people live and businesses operate 

through the smart application of ICTs could reduce global emissions by 15% by 

2015 (The Climate Group 2008). Biotechnology and nanotechnology could create 

environmental benefits mainly through the unique application in different sectors or 

5 A combination of this eco-innovation framework with the frameworks of system transition developed by 

some scholars (e.g. Geels 2005; Loorbach 2007; Carrillo-Hermosilla et al. 2009; Bleischwitz 2007) could 

further help understand the dynamic nature of radical changes created by eco-innovations.


Table 2 Application of technologies in different types of innovation 

Incremental innovation Systemic innovation 

Existing (but improved) technologies in existing application Existing technologies in new application 

New technologies in existing application New technologies in new application 

the convergence with existing technologies. Table 2 highlights the basic distinction 

(though there is not clear line) between incremental and systemic eco-innovation 

based on the way which existing or new, breakthrough technologies are applied. 

Figure 5 provides the other way to highlight the distinction based on the evolution of 

manufacturing processes and products and services towards sustainable production 

which was explored in Section 3. 

Needless to say, there are many barriers to enabling systemic innovation. Policy 

makers and industry are increasingly facing difficulties in investing in long-term 

future due to short political cycles and pressure from shareholders. Sector or 

technology-based approaches in conventional environmental policies may fail to 

take into account the full innovation cycle of environmental technologies and 

undermine opportunities for cross-sectoral application of new technologies. The 

market-based “getting prices right” measures such as carbon taxes and emissions 

trading schemes may not be enough to guide investment in promising technologies 

with high initial cost and much-needed green infrastructures. 

6 Conclusions: agenda for the future eco-innovation analysis 

In order to meet great environmental challenges such as climate change, much 

attention has been paid to innovation as a way to develop sustainable solutions. The 

concepts of eco-innovation are increasingly adopted by industry and policy makers 

as a way to facilitate more radical improvement in production processes and 

Fig. 5 Conceptual distinction between incremental and systemic eco-innovations


products and in corporate environmental performance. Eco-innovation can be 

understood in terms of its target, mechanism and impact. 

From the perspective of eco-innovation, the primary focus of sustainable 

manufacturing practices tends to be on technological advances for the modification 

and re-design of products or processes. However, some advanced industry players 

have adopted complementary organisational or institutional changes such as new 

business models or alternative modes of provision, for example, offering productservice 

solutions rather than selling physical products. 

As such, it is essential to capture both incremental and systemic (or radical) 

types of eco-innovation unlike the conventional economic and empirical research 

in this area. The former type of innovation mainly supports realising relative 

decoupling in the relatively short term, while the latter has potential for enabling 

absolute decoupling in the long term. Although improvements in eco-efficiency 

through incremental innovations have led to substantial environmental progress, 

the gains have often been offset by increasing consumption or outpaced by scale 

effects. In order for OECD countries to fulfil a potential post-Kyoto target of GHG 

emissions reduction, they will therefore need to engage in a broader range of ecoinnovations. 

Probably most needed for government is knowledge and competence to set 

balanced priorities between taking short-term “low-hanging fruit” and investing in 

long-term sustainable changes. The potential economic and environmental benefits 

of systemic innovation need to be identified, particularly where applications of new 

technologies can have highest benefits. To guide the processes of system transition 

and industry restructuring, visions and scenarios for further societal systems should 

be collectively developed and shared in different areas such as transport, housing 

and nutrition. 

In this context, the OECD project on Green Growth and Eco-innovation moved to 

its second phase in 2010 and works in three fronts: a) case studies of new business 

approaches to eco-innovation; b) analysis and case studies of policies to drive ecoinnovation; 

and c) empirical analysis of eco-innovation and the transition in 

industrial structures required to realise green growth. The first element is particularly 

relevant to the further development of the eco-innovation concept and framework as 

it will explore the potential of radical and systemic eco-innovation and learn how 

successes can be further extended and accelerated. This will be done by analysing 

the innovation processes of specific cases to be collected from member countries, 

including diverse aspects such as the source of the original idea, the business model, 

the role of partnerships and collaboration, the impact of policies in facilitating the 

innovation, the sources of funding and the potential economic and environmental 

benefits. 

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