By Ralf Martin, Imperial College and London School of Economics
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.