Environmental Innovation as a Pathway to a Sustainable Future

Fremont, CA: Cutting greenhouse gas emissions relies on low-carbon technologies that are both affordable and accessible. Green innovation has accelerated in recent years, delivering major progress in areas such as clean hydrogen, electric vehicles, renewable energy systems, and advanced battery storage.

However, the momentum of green innovation has recently waned. Notably, the diffusion of promising technologies that could substantially mitigate emissions lags must catch up in lower-income countries. Factors contributing to this slowdown include the effects of hydraulic fracturing, which has exacerbated oil price reductions, and the saturation of certain emerging technologies, particularly in the renewables sector, which has temperated the pace of innovation. Much of the financial returns from green innovation require substantial upfront investment; over time, reduced energy costs and enhanced energy-efficient industrial methods yield additional developmental benefits, primarily by lowering the incidence and severity of climate-related disasters.

Green innovation is interconnected with broader innovation trajectories, suggesting that advancements in green technology necessitate novel solutions rather than simply substituting existing technologies. Historically, economic growth has shown a positive correlation with innovation levels.

A pivotal question is how nations can enhance support for green innovation and its actualization. Evidence indicates that national and international climate policy is pivotal in stimulating green innovation. For example, our preferred indicator of green innovation—green patent filings—tends to rise by approximately 10 percent in the five years following a substantial reinforcement of climate legislation.

Effective policy measures that catalyze green innovation include emissions trading schemes that cap emissions, feed-in tariffs that establish guaranteed minimum prices for renewable energy producers, and government financial interventions such as R&D subsidies. Interestingly, global climate regulations bolster green innovation more significantly than localized efforts alone.

One rationale for the pronounced impact of policy coordination on domestic green innovation is the market size effect. When inventors anticipate access to a broader market that includes countries with aligned climate policies, their motivation to develop low-carbon technologies increases. Additionally, climate policies from other nations produce indigenous green inventions and knowledge and facilitate their application within domestic sectors, a phenomenon we term technological diffusion.

Furthermore, coordinated policy action and international climate agreements enhance public confidence in the commitment of nations to combat climate change, fostering greater certainty regarding domestic climate strategies.

Through mechanisms such as trade and foreign direct investment (FDI), climate policies facilitate the dissemination of low-carbon technologies to nations that are not traditional innovation hubs. Notably, countries with proactive climate regulations experience higher imports of low-carbon technologies and increased inflows of green FDI, particularly in emerging markets and developing economies.