Spillovers from clean versus dirty technologies and growth: implications for macro-modelling

Our recent work (Dechezlepretre, Martin & Mohnen, 2014, DMM) shows that clean innovation generates higher spillovers than dirty innovation. This could imply that shifting resources from dirty R&D to clean via a policy intervention can generate higher growth at th emacro level. However, the question arises what is driving this spillover gap? DMM explore explanations such as the suggestion that clean technologies are more general purpose or more original without much success. This leaves the explanation that spillovers – per innovation – are larger simply because clean technologies are a relatively un-explored field and there are decreasing returns to spillovers. Hence, what we measure is the higher marginal effect, however this advantage will dissipate once clean expands.

However, an implication of the presence of spillovers with decreasing returns is the possibility of multiple market equilibria some of which are inferior. Hence, if the economy is locked in an inferior equilibrium a policy intervention can lead to sustainable welfare improvement. In this note we develop a simple model that illustrates this.

Policy brief on clean innovation and growth

Are climate policies good or bad for growth? Many policy makers who are trying to implement such policies are promising positive growth effects not only in the long run of 50 to 100 years, when effective climate policies will help to mitigate the potentially catastrophic economic consequences of climate change, but also in the short run when such policies are primarily perceived as a cost burden on businesses.

Sustained growth of per capita income can only be achieved by continued innovation; i.e. by continuously coming up with ever more sophisticated ways to transform a limited set of resources into economic value. It is now well established that effective climate policies induce innovation in clean technologies that help to reduce greenhouse gas emissions (GHG). However, by making polluting activities less profitable, climate policies also reduce innovation activity in polluting technologies. For example, our previous research on the automotive industry has documented that an increase in fuel prices – which would also happen as a consequence of the introduction of carbon pricing – increases innovation related to electric, hybrid and hydrogen vehicles but depresses innovation related to the internal combustion engine. Therefore, the overall consequences of climate policies in terms of economic growth will be determined by the net effect of the increase in clean and the reduction in dirty innovation. Should we expect this effect to be positive? Clean technologies comprise of a range of new and relatively unexplored technology fields. This could imply that there are opportunities for large economic gains similar to the emergence of Information & Communications Technologies over the last 40 years.

However, this does not necessarily mean that climate policies will have a positive effect on growth. What matters for growth are not the overall economic gains between clean and dirty technologies but if there is a significant difference in the non-private economic returns. These non-private economic returns are what we refer to as innovation spillovers. An obvious example of such a spillover is Android-based smart phones. It was Apple that first launched the now dominant design of smart phones. However, other companies such as Google were also able to benefit from the original R&D investments undertaken by Apple by copying or improving the original design.

Knowledge spillovers from clean and dirty technologies: a patent citation analysis

This report is co-authored by Antoine Dechezleprêtre, Grantham Research Institute on Climate Change and the Environment, London School of Economics; and  Myra Mohnen, University College London.

How much should governments subsidize the development of new clean technologies? We use patent citation data to investigate the relative intensity of knowledge spillovers in clean and dirty technologies in four technological fields: energy production, automobiles, fuel and lighting. We find that clean patents receive on average 43% more citations than dirty patents. We also look at indirect spillovers using Google’s Page Rank applied to patent data. This suggests that clean patents are also cited by more prominent patents. These results hold for all four technological areas. Two factors are shown to explain the clean superiority: clean technologies have more general applications, and they are radically new compared to more incremental dirty innovation. Knowledge spillovers from clean technologies are comparable in scale to those observed in the IT sector. Our results mean that stronger public support for clean R&D is warranted. They also suggest that green policies might be able to boost economic growth.