This policy brief provides evidence to inform the strategy to support low-carbon innovation, to be published with the second State of the Energy Union report in late 2016 and other initiatives seeking to stimulate low-carbon innovation.
Key findings include:
Public policies that put a price on carbon (emissions trading systems, carbon taxes or energy efficiency mandates) are a crucial driver for the adoption of environmentally friendly technologies and induce innovation in low-carbon technologies.
The impact appears both large and rapid: much of the innovative response to climate change policy measures occurs within five years or less. Thus, climate change regulations can help economies break away from a polluting economic trajectory and move to a low-carbon one.
A crucial challenge for climate change policies is ensuring that low-carbon innovation activity is either additional to current research or development (R&D) expenditures, or at least displaces innovation in polluting technologies rather than other socially valuable innovation.
Policies that change the relative price of low-carbon and high-carbon inputs, such as carbon markets or fuel taxes, can play this role effectively.
Price-based instruments, such as carbon markets, and quantity-based instruments, such as renewable energy targets, tend to favour innovation in technologies that are closest to the market.
Thus, they need to be complemented by direct support to emerging technologies that will be essential to meet long-term emissions reduction targets. Support for emerging technologies could come via increased public funding for R&D or via policies such as feed-in tariffs.
Current deployment efforts should be augmented with additional R&D
Support, such that the marginal euro spent on low-carbon technologies should go to R&D rather than deployment.
European countries have been emphasising technology deployment through feed-in tariffs for renewable energy production over direct R&D support, but this approach may not provide sufficient stimulus to develop the next generation of low-carbon technologies. From a political point of view, an additional advantage of direct support to R&D is that by definition it is targeted at domestic manufacturers, while feed-in tariffs may encourage innovation activity mostly in foreign countries.