Energy, the Environment, and Innovation

In this paper we review the theoretical and empirical literature on the role of policies in stimulating innovation that is designed to produce greener and more energy-efficient technologies. First we review the theoretical literature on the role of purely environmental policies in inducing firms to undertake environmental innovation. The conclusion is that for a wide range of policies and in a wide range of circumstances one cannot prove that these policies necessarily induce greater innovation. We then consider the empirical evidence, which suggests that the effect of these policies is weak but that the largest effects come in the long run when, through learning-by-doing, firms better understand the scope and potential for new energy-efficient technologies. Finally we consider the design of both environmental and technology policies, and show that the interaction of these policies is complex and warrants considerable further research. Copyright 2002, Oxford University Press.