The challenge of green innovation

Green innovations are ones that lower the externalities of production or consumption. This study emphasizes three points. The first point is that green innovation suffers from a double externality: there are inadequate returns to the production of green goods and services, and also incentives to undertake innovative activities are diluted by imitation. Second, many environmental challenges will require deep technological changes. An example is production for a zero-carbon electricity sector, where key technologies are not yet economical or available on a large scale. Third, technological changes depend upon the activities of profit-oriented firms, and profits primarily drive R&D of these entities. Appropriate incentives for firms can be accomplished by ensuring that major externalities are internalized, such as by putting a price on pollution, and in addition by increasing governmental subsidies, particularly for fundamental research.