Energy, the Environment, and Innovation

In this paper we review the theoretical and empirical literatureon the role of policies in stimulating innovation that is designedto produce greener and more energy-efficient technologies. Firstwe review the theoretical literature on the role of purely environmentalpolicies in inducing firms to undertake environmental innovation.The conclusion is that for a wide range of policies and in awide range of circumstances one cannot prove that these policiesnecessarily induce greater innovation. We then consider theempirical evidence, which suggests that the effect of thesepolicies is weak but that the largest effects come in the longrun when, through learning-by-doing, firms better understandthe scope and potential for new energy-efficient technologies.Finally we consider the design of both environmental and technologypolicies, and show that the interaction of these policies iscomplex and warrants considerable further research.