Economics-Watching: How Green Innovation Can Stimulate Economies and Curb Emissions

[from IMF Blog, by Zeina Hasna, Florence Jaumotte & Samuel Pienknagura]

Coordinated climate policies can spur innovation in low-carbon technologies and help them spread to emerging markets and developing economies

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 markets and developing economies.

IMF research [archived PDF] 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 the 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 addressing climate change.

Climate policies even help spread the use of low-carbon technologies in countries that are not sources of innovation, through 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 markets 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.

In addition, and given evidence of economies of scale, protectionism—with ultimately smaller potential markets—could stifle incentives for green innovation and lead to duplication of efforts across countries.

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 markets 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.

Essay 47: Novels as a Kind of University Demonstrating Storms of Global Finance and Technification

Edith Wharton began writing The Age of Innocence in 1917 as a way of recalling and criticizing the world of her youth, which had not yet experienced the devastation of World War I (1914–18).  Beginning in July 1920, the novel was published in serial form in New York’s monthly Pictorial Review.

The centrality of finance and technical change can be seen. We are reminded of the very first line in The Magnifcent Ambersons of Booth Tarkington, which tells the reader that the basis of the magnificence of the Ambersons was established when they somehow benefited from the 1873 financial crisis which destroyed many others. (Whether the Ambersons were shrewd or lucky or wily is not clarified.)

The Age of Innocence is set in New York in the 1870s and the financial storm and “techno-storm” become vital:

The Panic of 1873:

In The Age of Innocence, the investment bank run by Julius Beaufort collapses, bringing shame upon him and his wife and throwing New York into a tizzy. Beaufort’s business failure is a fictionalized version of the Panic of 1873, industrial capitalism’s first worldwide depression. Then, the United States backed its currency with both silver and gold, but when Germany and several other countries stopped using silver to back their currency, the price of silver fell precipitously, devaluing U.S. currency. The U.S. Treasury made matters worse by releasing large amounts of paper money into the economy. Speculators and bankers now had to immediately pay off their debts with gold.

In 1873, a prominent investment banker by the name of Jay Cooke went bankrupt, the effects rippled throughout the entire U.S. economy, and panic ensued. Trading was suspended for two weeks on the New York Stock Exchange as company after company failed, wages dropped precipitously, and unemployment spiked. The rise of the labor movement can be traced to the widespread unrest and economic instability set off by the panic. Additionally, the panic allowed a few of the wealthiest businessmen—such as Andrew Carnegie, John Rockefeller, and Cyrus McCormick, who retained access to valuable capital—to vastly increase their wealth and snuff out competitors.

Technological Advancements

Characters in The Age of Innocence are aware their world is about to be forever changed by the culture of outsiders, brought to them in part by advancements in technology. Although inventions like the telephone were on the horizon, they seemed improbably fantastic to people living in the early 1870s world of telegrams and horse-drawn carriages. However, in the final chapter, Wharton depicts Newland Archer living in a world that has been significantly altered by these technologies, a mere quarter century later.

In 1876, for example, American inventor Alexander Graham Bell (1847-1922) patented an early telephone and wowed audiences by demonstrating the world’s first telephone call by placing a call from one telegraph station to another five miles away.  The Western Union company refused to buy Bell’s telephone patent, claiming his invention would amount to no more than a novelty. However, the first telephone line was built in 1877-78, and after that, telephone usage skyrocketed.  At the start of the 1880s, there were almost 50,000 telephones in use, a number that swelled to over half a million by the turn of the century.

A similar large-scale change was the invention and development of electricity. Although the first electric light was developed in 1835, it was not until 1879 that American inventor Thomas Edison (1847-1931) developed and patented a light bulb with a life span of 15 hours. Edison’s work also focused on the problems of electrical generation and conductivity.

At the same time that communication was becoming easier and the day was lengthened artificially through electric lighting, the distance between continents was shortened by advances in turbine steam engines

In the 1860s, it took between eight and nine days to cross the Atlantic Ocean; by 1907, the Mauretania (the ship that Dallas and Newland Archer take to Europe in the last chapter) makes the voyage in half that time.  This was a contributing factor to the great influx of European immigrants who arrived in the United States during the late 19th and early 20th centuries.

In Chapter 29, Newland contemplates the “brotherhood of visionaries,” who predict a train tunnel under the Hudson River as well as “ships that would cross the Atlantic in five days … and other Arabian Night marvels.” In 1904, excavation for train tunnels under the Hudson began, directed by Alexander Cassatt, president of the Pennsylvania Railroad. In 1910, New York’s Penn Station opened and began receiving traffic from electric trains that traveled through the tunnels.

Notice that the novel The Magnificent Ambersons is from 1918, Edith Wharton’s Age of Innocence from 1920. In each, the personal storms of private emotion are somewhat carried along and swept up into the storms coming from national and even global finance (1873 caused a tremendous crash in Germany and Austria called the “Grunderkrach” [founder’s crash]) as well as techno-waves that are very baffling to the people of the time.