How Green Innovation Can Stimulate Economies and Curb Emissions

Making low-carbon technologies cheaper and more widely available is crucial
to reducing harmful emissions.

We have seen decades of progress in green innovation for mitigation and
adaptation: from electric cars and clean hydrogen to renewable energy and
battery storage.

More recently though, momentum in green innovation has slowed. And
promising technologies aren’t spreading fast enough to lower-income
countries, where they can be especially helpful to curbing emissions. Green
innovation peaked at 10 percent of total patent filings in 2010 and has
experienced a mild decline since. The slowdown reflects various factors,
including hydraulic fracking that has lowered the price of oil and
technological maturity in some initial technologies such as renewables,
which slows the pace of innovation.

The slower momentum is concerning because, as we show in a new staff
discussion note, green innovation is not only good for containing climate
change, but for stimulating economic growth too. As the world confronts one
of the

weakest five-year growth outlooks in more than three decades, those dual benefits are particularly appealing. They ease concerns about
the costs of pursuing more ambitious climate plans. And when countries act
jointly on climate, we can speed up low-carbon innovation and its transfer
to emerging market and developing economies.

Our research shows that doubling green patent filings can boost gross
domestic product by 1.7 percent after five years compared with a baseline
scenario. And that’s under our most conservative estimate—other estimates
show up to four times the effect.

The economic benefits of green innovation mostly flow through increased
investment in the first few years. Over time, further growth benefits come
from cheaper energy and production processes that are more energy
efficient. Most importantly, they come from less global warming and less
frequent (and less costly) climate disasters.

Green innovation is associated with more innovation overall, not just a
substitution of green technologies for other kinds. This may be because
green technologies often require complementary innovation. More innovation
usually means more economic growth.

A key question is how countries can better foster green innovation and its
deployment. We highlight how domestic and global climate policies spur
green innovation. For example, a big increase in the number of climate
policies tends to boost green patent filings, our preferred proxy for green
innovation, by 10 percent within five years.

Some of the most effective policies to stimulate green innovation include
emissions-trading schemes that cap emissions, feed-in-tariffs, which
guarantee a minimum price for renewable energy producers, and government
spending, such as subsidies for research and development. What’s more,
global climate policies result in much larger increases in green innovation
than domestic initiatives alone. International pacts like the Kyoto
Protocol and Paris Agreement amplify the impact of domestic policies on
green innovation.

One reason policy synchronization has a prominent impact on domestic green
innovation is what is called the market size effect. There’s more incentive
to develop low-carbon technologies if innovators can expect to sell into a
much larger potential market, that is, in countries which adopted similar
climate policies.

Another is that climate policies in other countries generate green
innovations and knowledge that can be used in the domestic economy. This is
known as technology diffusion. Finally, synchronized policy action and
international climate commitments create more certainty around domestic
climate policies, as they boost people’s confidence in governments’
commitment to address climate change.

Climate policies even help spread the use of low-carbon technologies in
countries that are not sources of innovation, though trade and
foreign-direct investment. Countries that introduce climate policies see
more imports of low-carbon technologies and higher green FDI inflows,
especially in emerging market and developing economies.

Risks of protectionism

Lowering tariffs on low-carbon technologies can further enhance trade and
FDI in green technologies. This is especially important for middle- and
low-income countries where such tariffs remain high. On the flipside, more
protectionist measures would impede the broader spread of low-carbon
technologies.

The risks of protectionism are exacerbated when climate policies, such as
subsidies, do not abide by international rules. For example, local content
requirements, whereby only locally produced green goods benefit from
subsidies, undermine trust in multilateral trade rules and could result in
retaliatory measures.

Beyond embracing a rules-based approach to climate policies, the advanced
economies, where most green innovation occurs, have an important
responsibility: sharing the technology so that emerging and developing
economies can get there faster. Such direct technology transfers hold the
promise of a double dividend for emerging market and developing
economies—reducing emissions and yielding economic benefits.

—This blog reflects research by Zeina Hasna, Florence Jaumotte, Jaden
Kim, Samuel Pienknagura and Gregor Schwerhoff.