## sdnea2023008 - Executive Summary

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### Key findings on green innovation and macro/firm effects
- Green innovation has slowed in recent years after steady increases since the early 1980s and a peak share in 2010.
- Green innovation is a powerful tool to curb emissions and help firms and households adapt to climate change, but reaching net zero will require substantial additional innovations.
- An acceleration in green innovation:
  - Has a positive impact on economic activity in the short to medium term.
  - Has a positive impact on firm revenue.
  - Produces a pro-growth effect comparable to that of nongreen patents and to growth effects of previous technological breakthroughs such as the information and communications technology (ICT) revolution.
- Channels differ between green and nongreen patents:
  - Green patents work initially mostly through higher investment.
  - Nongreen patents also have a positive short-term impact on productivity.
  - Productivity benefits of green innovation could materialize beyond the horizon considered due to greater energy efficiency and cheaper energy sources.
- Climate policies lift overall innovation—not just green innovation—implying additional growth boosts.

### Effects of climate policies on innovation, trade, and FDI
- Domestic climate policies increase green patenting:
  - A major jump in climate policies (equivalent to one standard deviation of the distribution of changes in the number of climate policies) boosts green patent filings by 10 percent in five years.
- Particularly impactful instruments:
  - Regulations, emissions-trading systems that limit emissions, and expenditure measures such as R&D subsidies and feed-in tariffs.
- Global climate policies affect domestic green patent filings even more than domestic policies do; international climate agreements amplify the impact of domestic policies.
- Climate policies raise deployment of low-carbon technologies (LCTs) through trade and green FDI inflows, with stronger effects in emerging market and developing economies.
- Climate policies do not appear to depress total FDI.
- Lowering tariffs raises both LCT trade and green FDI inflows; LCT tariffs remain high in middle- and low-income countries.
- Protectionist measures risk impeding diffusion of LCTs and could slow transfer of LCT goods to emerging market and developing economies amid geoeconomic fragmentation.

### Cross-border spillovers, coordination, and risks
- Climate policies introduced in advanced economies result in stronger deployment of LCTs in the rest of the world through trade and green FDI outflows.
- Some policy instruments—most notably green subsidies—reduce green FDI outflows:
  - Subsidies can address externalities and market failures and lower LCT prices in the long term, but they may create tensions between domestic and global climate objectives.
  - Advanced economies should weigh potential negative spillovers, especially for emerging market and developing economies with less fiscal space; avoid a race to the bottom; and ensure consistency with international rules, including avoiding local content requirements.
- Evidence of positive climate policy spillovers on innovation across countries suggests that a fragmented world—with smaller potential markets—could stifle incentives for green innovation and slow LCT transfer to emerging market and developing economies.

### Patenting trends and measurement details
- Primary measure: count of climate-change-mitigating patent families filed in a given country-year using PATSTAT technical classification.
- Patents counted focus on climate-change-mitigating technologies that (1) control, reduce, or prevent greenhouse gas emissions or (2) help adapt to the adverse effects of climate change.
- Analysis focuses on patents filed and granted in at least two application authorities (labeled “family size 2”) regarded as higher-quality patents.
- Aggregate and share statistics:
  - Green filings peaked in 2010 but have declined slightly since.
  - Green filings account for an average share of 6.6 percent of total filings since 2010.
  - Restricting to family size 2, green filings account for 10 percent of total filings.
  - Green patent filings of family size 1 averaged about 115,000 annually between 2010 and 2018.
  - Green patents of family size 2 averaged about 19,000 annually between 2010 and 2018.
- Composition and geography:
  - Eight (not mutually exclusive) green technology subcategories: (1) adaptation to climate change; (2) buildings; (3) carbon capture and storage of greenhouse gases; (4) ICT aimed at the reduction of energy use; (5) production, distribution, and transport of energy; (6) industry and agriculture; (7) transportation; and (8) waste management and wastewater.
  - Energy, transport, and production account for the lion’s share of green patent filings.
  - Energy alone constitutes 35 percent of green patent filings and 2.5 percent of total filings on average.
  - More than 90 percent of green patents were filed in advanced economies during 1980–2000.
  - More than 60 percent of filings were concentrated in nine countries (Group of Seven, China, and Korea).
  - Since the 2000s, emerging markets have gained momentum; share of filings in advanced economies fell to about 80 percent by 2019.
- Limitations of patents as a gauge of innovation:
  - Patents capture only technological—product and process—innovations and miss organizational and managerial innovations.
  - Patents may omit innovations not patented for strategic reasons.
  - Single-country patent filings (family size 1), particularly driven by Chinese subsidization programs, are on average of lower quality; hence the focus on family size 2.

### Macroeconomic impact of green innovation (aggregate evidence)
- Data and scope:
  - Analysis uses patent filings in OECD and BRICS countries between 1990 and 2019.
- Effects on real GDP:
  - An increase in climate-change-mitigation patent filings boosts real GDP, with effects peaking after three years.
  - Estimated implication: an increase in the flow of patent filings (an acceleration in patenting) of 7 percent (the annual growth rate observed in the data) leads to a 0.14 percent increase in GDP after five years relative to the baseline scenario.
  - The impact of nongreen patent filings on GDP is quantitatively similar to green patents, but timing differs: the pro-growth impact of nongreen patents materializes after two years and peaks after five years.
- Robustness and identification:
  - These estimates represent a lower bound:
    - Effects increase twofold when controlling for climate policies.
    - Effects increase fourfold when instrumenting domestic patent filings to control for potential reverse impact of economic growth on patenting activity.
  - Across exercises, effects of green patent filings on economic activity are comparable to those of nongreen patent filings.
- Transmission channels:
  - Green patent filings boost output initially through higher investment.
  - Green patents yield a short-term increase in real investment, which is slightly larger than the increase caused by nongreen patent filings.
  - Aggregate total factor productivity (TFP) is not enhanced by green patent filings over the horizon considered, unlike nongreen patent filings.

### Firm-level effects of green patents
- Evidence for US public firms:
  - New green patent filings have a positive impact on firms’ revenue.
  - A one standard deviation increase in the quality-adjusted measure of patents held by firms yields a 2 percent increase in revenue after five years.
- Comparison with nongreen patents:
  - The effect of green innovation on revenue is initially smaller than that of nongreen innovation.
- Firm green intensity:
  - Most firms introducing green patents have low green intensity, defined as a firm’s ratio of green patents to total patents, implying production systems still rely mostly on nongreen technologies.

### Benchmarking versus the ICT revolution
- ICT patents have an impact on real economic activity comparable to that of green patents.
- Both ICT and green innovations initially boost economic activity primarily through higher investment; TFP gains accumulate more progressively.
- During the ICT revolution period (1995–2005), the impact of ICT patent filings on GDP was lower than in subsequent years.
- The impact on TFP during the ICT revolution was almost half to two-thirds lower than its average impact over the whole sample period.

### Heterogeneity across income groups, policy instruments, and trade barriers
- Sample and method:
  - 42 countries comprising OECD countries and BRICS, excluding India, during 1990–2019; local projection method (Jordà 2005); controls include time trend, global oil prices, key dates of major climate policy events, and a measure of global policies.
- Tariffs, trade barriers, and income-group differences:
  - LCT applied tariffs are typically lower than tariffs on non-LCT goods across all income groups, but LCT applied tariffs are noticeably higher on average in middle- and low-income countries than in high-income countries.
  - Progress in tariff reductions has stalled; LCT applied tariffs have actually increased.
  - Nontariff barriers for LCT goods are higher than for non-LCT goods in upper-middle-income countries.
- Climate policies and patent filings — key quantitative effects:
  - A one standard deviation increase in climate policies boosts green patent filings by 2.9 percent in two years and up to 10.3 percent in five years.
  - A one standard deviation increase in the Environmental Policy Stringency (EPS) Index raises green patent filings by 2.5 percent in two years and up to 7.2 percent in five years.
  - A one standard deviation increase in the stock of climate policies increases total patent filings by 6.9 percent after five years.
- Effectiveness of policy instruments (impacts measured two and four years after shocks):
  - Regulations: a one standard deviation increase can increase green patent filings by 5 percent four years after the change.
  - Quantity-targeting revenue instruments (for example, emissions-trading schemes): increase green patent filings by 4.7 percent after four years.
  - Pricing-based revenue measures (carbon taxes and fees): weak short- to medium-term effect in this analysis.
  - Feed-in tariffs (FIT) and R&D subsidies: increase green patents by 5.6 percent in four years.
  - Other expenditure measures: not found to be conducive to innovation in this analysis.
- Role of global events and global policies:
  - Key climate policy events (IPCC reports to Paris Agreement) almost double the medium-term effect of domestic policies on green patent filings.
  - A one standard deviation increase in distance-weighted global policies increases domestic patent filings by close to 20 percent after five years.

### LCT diffusion, trade, and green FDI (quantitative highlights)
- Broad trends:
  - LCT imports recovered dynamism since 2016, especially in advanced economies.
  - Global green FDI has accelerated since 2016 and "tripled as a share of global GDP between 2014 and 2022."
  - Green FDI as a share of total greenfield FDI: "10 percent of total greenfield FDI between 2014 and 2017, and by 2022 it had reached 40 percent of total investment."
- Impact of domestic climate policies on LCT trade and green FDI:
  - A one standard deviation increase in the stock of climate policies increases real LCT imports by about 1.5 percent on impact and increases LCT imports to GDP by about 0.5 percent on impact.
  - An increase in the number of climate policies leads to higher green FDI inflows as a share of GDP.
  - Gravity estimations: a one standard deviation change in the stock of climate policies in the recipient country is estimated to increase bilateral green FDI inflows by 7 percent, on average.
- Tariff effects:
  - A one standard deviation reduction in LCT tariffs (equivalent to closing one-third of the gap between EMDEs and AEs in one year) is associated with a 4 percent increase in the LCT-trade-to-GDP ratio and a 6 percent increase in LCT imports.
  - A one standard deviation decrease in LCT tariffs in the recipient country yields a 15 percent increase in bilateral FDI flows (values).
  - Lower LCT tariffs also increase green FDI inflows and green projects.
- Policy-instrument heterogeneity for green FDI:
  - Government revenue and expenditure measures have a strong positive impact on green FDI inflows and projects in the destination country.
  - Nonbinding neutral policies have a nonsignificant impact.
  - Subsidies and some expenditure measures in source countries are associated with lower green FDI outflows and fewer green FDI projects abroad in the short to medium term.

### Emissions intensities and potential gains from technology transfer
- Firm-level emissions analysis (scope 1 and 2):
  - Within-industry counterfactuals indicate substantial emissions reduction potential if high-emissions firms converged to advanced-economy medians.
  - Capelle and others (forthcoming): keeping production constant, emissions from firms in emerging market and developing economies could be reduced by 70 percent if high-emissions-intensity firms converged to the median level observed in advanced economy firms in the same narrowly defined industry.
- Box 2 quantitative example:
  - If all firms with emissions intensity above the 25th percentile could improve to the 25th percentile, emissions in advanced economies could decrease by 55 percent, assuming unchanged production; reductions would be larger in emerging market and developing economies.

### Policy implications and recommendations
- Sequence and mix:
  - Combine expansion in the stock of climate policies with lower trade costs for LCTs to boost green innovation and accelerate deployment.
  - Use regulations, emissions-quantity instruments, and targeted expenditure support (FIT & R&D subsidies) to stimulate green patenting in the medium term.
  - Recognize that pricing-based carbon measures may matter more over longer horizons than captured in short- to medium-term aggregate data.
- International coordination:
  - Coordinate policies to leverage market-size effects and technology spillovers; global policies amplify domestic policy impacts.
  - Avoid subsidy races and protectionist measures that could impede LCT diffusion to emerging market and developing economies.
  - Ensure policy design consistency with WTO rules and avoid local content requirements.
- Government role in innovation and deployment:
  - Scale up existing LCTs where deployment can deliver large near-term emissions reductions ("Over 80 percent of the emissions reductions needed by 2030 can be achieved if the use of existing technologies can be scaled up (Pigato and others 2020).").
  - Fund basic research for long‑lead technologies needed for net zero ("75 percent of the LCTs needed by 2050 either need to be developed beyond the prototype level or require R&D investment to become commercially viable (IEA 2020a).").
  - Target public support to technologies requiring large upfront investment and long development timelines (for example, green hydrogen and negative emissions technologies).

*Source: sdnea2023008 - Executive Summary and selected excerpts, International Monetary Fund.*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Introduction
- Sets the scope and objectives of the study on green innovation and diffusion.
- Frames the focus on low-carbon technologies (LCTs), their innovation dynamics, and macroeconomic and firm-level performance implications.

### II. Innovation in LCTs: Recent Trends and Economic Impact
- Reviews recent trends in patenting and the state of innovation in LCTs.
- Examines the economic impact of green innovation at macro and firm levels, including measures of patent activity and relationships with economic outcomes.
- Subtopics (as structured in the report):
  - II.1. Patenting Trends: The State of Innovation
  - II.2. The Economic Impact of Green Innovation

### III. Environmental Policies as a Conduit of Green Innovation and Deployment
- Analyzes how climate and environmental policies influence green innovation, trade in LCTs, and green foreign direct investment (FDI).
- Distinguishes the role of domestic policies from cross-border effects of policies.
- Subtopics (as structured in the report):
  - III.1. Climate Policies and Patent Filings
  - III.2. The Impact of Climate Policies on LCT Trade and Green FDI
  - The Role of Domestic Policies
  - Cross-Border Effect of Policies

### IV. Conclusions and Policy Implications
- Synthesizes findings and draws out policy implications aimed at accelerating green innovation and diffusion.
- Highlights recommended areas of policy focus to enhance deployment of LCTs and to improve macroeconomic and firm-level performance tied to green innovation.

*STAFF DISCUSSION NOTES Green Innovation and Diffusion: Policies to Accelerate Them and Expected Impact on Macroeconomic and Firm-level Performance — INTERNATIONAL MONETARY FUND*

### Executive Summary

### sdnea2023008 - Executive Summary

### Key findings on green innovation and macro/firm effects
- Green innovation has slowed in recent years after steady increases since the early 1980s and a peak share in 2010.
- Green innovation is a powerful tool to curb emissions and help firms and households adapt to climate change, but reaching net zero will require substantial additional innovations.
- An acceleration in green innovation:
  - Has a positive impact on economic activity in the short to medium term.
  - Has a positive impact on firm revenue.
  - Produces a pro-growth effect comparable to that of nongreen patents and to growth effects of previous technological breakthroughs such as the information and communications technology (ICT) revolution.
- Channels differ between green and nongreen patents:
  - Green patents work initially mostly through higher investment.
  - Nongreen patents also have a positive short-term impact on productivity.
  - Productivity benefits of green innovation could materialize beyond the horizon considered due to greater energy efficiency and cheaper energy sources.
- Climate policies lift overall innovation—not just green innovation—implying additional growth boosts.

### Effects of climate policies on innovation, trade, and FDI
- Domestic climate policies increase green patenting: a major jump in climate policies (equivalent to one standard deviation of the distribution of changes in the number of climate policies) boosts green patent filings by 10 percent in five years.
- Particularly impactful instruments: regulations, emissions-trading systems that limit emissions, and expenditure measures such as R&D subsidies and feed-in tariffs.
- Global climate policies affect domestic green patent filings even more than domestic policies do; international climate agreements (such as the Kyoto Protocol and Paris Agreement) amplify the impact of domestic policies.
- Climate policies raise deployment of low-carbon technologies (LCTs) through trade and green FDI inflows, with stronger effects in emerging market and developing economies.
- Climate policies do not appear to depress total FDI.
- Lowering tariffs raises both LCT trade and green FDI inflows; LCT tariffs remain high in middle- and low-income countries.
- Protectionist measures risk impeding diffusion of LCTs and could slow transfer of LCT goods to emerging market and developing economies amid geoeconomic fragmentation.

### Cross-border spillovers, coordination, and risks
- Climate policies introduced in advanced economies result in stronger deployment of LCTs in the rest of the world through trade and green FDI outflows.
- Some policy instruments—most notably green subsidies—reduce green FDI outflows:
  - Subsidies can address externalities and market failures and lower LCT prices in the long term, but they may create tensions between domestic and global climate objectives.
  - Advanced economies should weigh potential negative spillovers, especially for emerging market and developing economies with less fiscal space; avoid a race to the bottom; and ensure consistency with international rules, including avoiding local content requirements.
- Evidence of positive climate policy spillovers on innovation across countries suggests that a fragmented world—with smaller potential markets—could stifle incentives for green innovation and slow LCT transfer to emerging market and developing economies.

### Patenting trends and measurement details
- Primary measure: count of climate-change-mitigating patent families filed in a given country-year using PATSTAT technical classification.
- Patents counted focus on climate-change-mitigating technologies that (1) control, reduce, or prevent greenhouse gas emissions or (2) help adapt to the adverse effects of climate change.
- Analysis focuses on patents filed and granted in at least two application authorities (labeled “family size 2”) regarded as higher-quality patents.
- Aggregate and share statistics:
  - Green filings peaked in 2010 but have declined slightly since.
  - Green filings account for an average share of 6.6 percent of total filings since 2010.
  - Restricting to family size 2, green filings account for 10 percent of total filings.
  - Green patent filings of family size 1 averaged about 115,000 annually between 2010 and 2018.
  - Green patents of family size 2 averaged about 19,000 annually between 2010 and 2018.
- Composition and geography:
  - Eight (not mutually exclusive) green technology subcategories: (1) adaptation to climate change; (2) buildings; (3) carbon capture and storage of greenhouse gases; (4) ICT aimed at the reduction of energy use; (5) production, distribution, and transport of energy; (6) industry and agriculture; (7) transportation; and (8) waste management and wastewater.
  - Energy, transport, and production account for the lion’s share of green patent filings.
  - Energy alone constitutes 35 percent of green patent filings and 2.5 percent of total filings on average.
  - More than 90 percent of green patents were filed in advanced economies during 1980–2000.
  - More than 60 percent of filings were concentrated in nine countries (Group of Seven, China, and Korea).
  - Since the 2000s, emerging markets have gained momentum; share of filings in advanced economies fell to about 80 percent by 2019.
- Limitations of patents as a gauge of innovation:
  - Patents capture only technological—product and process—innovations and miss organizational and managerial innovations.
  - Patents may omit innovations not patented for strategic reasons.
  - Single-country patent filings (family size 1), particularly driven by Chinese subsidization programs, are on average of lower quality; hence the focus on family size 2.

### Research scope and key questions addressed
- The SDN quantifies the short- to medium-term impact of green innovation on economic activity and examines policy roles in fostering innovation and deployment of LCTs.
- Core questions:
  - What is the short- to medium-term impact of green innovation on economic activity, and what are the key channels through which it affects growth?
  - Can climate policies yield higher green innovation and catalyze green FDI and trade in LCTs?
  - Does the choice of policy instruments matter for accelerating green innovation and deployment?
  - What are the cross-border spillover effects of climate policies for domestic innovation and deployment?
- Contributions relative to prior literature:
  - Explores channels (investment and productivity) through which green innovation affects activity and compares green versus nongreen innovation and ICT.
  - Assesses impacts across advanced and emerging market and developing economies.
  - Accounts for global policies and key global climate events alongside domestic policies.
  - Provides evidence on climate policies and trade policies for LCT deployment through trade and FDI, and on cross-country climate policy spillovers.
  - Uses a comprehensive, granular climate policy database across countries, sectors, and instrument types.

*Source: sdnea2023008 - Executive Summary, International Monetary Fund.*

### 1. Evolution of Granted Green Patents

### 1. Evolution of Granted Green Patents

### Trends in green patenting and drivers of the slowdown
- Recent years show a slowdown in the share of green patents, raising concerns about timely progress on climate change mitigation.
- Potential factors behind the slowdown:
  - The rise of hydraulic fracking, which has lowered oil prices and diverted attention from clean energy technologies.
  - Technological maturity in key fields reducing the pace of new inventions (International Energy Agency analyses; Popp and others 2020).
- Solar photovoltaic (PV) example:
  - Solar PV now accounts for almost half of total global electricity generation investment.
  - Rapid PV deployment largely reflects improved know-how and cost efficiency in exploiting existing technology rather than new solar PV-related inventions.
  - A cited study argues that more than 80 percent of the emissions reductions needed by 2030 can be achieved by scaling up existing technologies, implying a shift from innovation to deployment (Pigato and others 2020).
- IEA assessment:
  - IEA (2020a) argues that about 75 percent of the cumulative CO2 emissions reductions needed for a sustainable path come from technologies currently at the prototype or demonstration phase or not yet commercially deployed on a mass-market scale.
- Implication:
  - Key technologies required to bring the global economy to net zero emissions by mid-century are still missing or only at a very early stage of development.
  - Because innovations often take decades to reach maturity, rekindling green innovation efforts in this decade is urgent.

### Macroeconomic impact of green innovation
- Data and scope:
  - Analysis uses patent filings in OECD and BRICS countries between 1990 and 2019.
- Effects on real GDP:
  - An increase in climate-change-mitigation patent filings boosts real GDP, with effects peaking after three years.
  - Estimated implication: an increase in the flow of patent filings (an acceleration in patenting) of 7 percent (the annual growth rate observed in the data) leads to a 0.14 percent increase in GDP after five years relative to the baseline scenario.
  - The impact of nongreen patent filings on GDP is quantitatively similar to green patents, but timing differs: the pro-growth impact of nongreen patents materializes after two years and peaks after five years.
- Robustness and identification:
  - These estimates represent a lower bound:
    - Effects increase twofold when controlling for climate policies.
    - Effects increase fourfold when instrumenting domestic patent filings to control for potential reverse impact of economic growth on patenting activity.
  - Across exercises, effects of green patent filings on economic activity are comparable to those of nongreen patent filings.
- Transmission channels:
  - Green patent filings boost output initially through higher investment.
  - Green patents yield a short-term increase in real investment, which is slightly larger than the increase caused by nongreen patent filings.
  - Aggregate total factor productivity (TFP) is not enhanced by green patent filings over the horizon considered, unlike nongreen patent filings.
  - Possible explanation: path dependency—incorporating new technologies may initially disrupt existing production processes, reducing short- to medium-term TFP benefits.

### Firm-level effects of green patents
- Evidence for US public firms:
  - New green patent filings have a positive impact on firms’ revenue.
  - A one standard deviation increase in the quality-adjusted measure of patents held by firms yields a 2 percent increase in revenue after five years.
- Comparison with nongreen patents:
  - The effect of green innovation on revenue is initially smaller than that of nongreen innovation.
  - Interpretation: production systems’ continued reliance mostly on nongreen technologies (path dependency) delays full productivity benefits from green technologies.
- Firm green intensity:
  - Most firms introducing green patents have low green intensity, defined as a firm’s ratio of green patents to total patents.
  - This implies most firms still rely on nongreen technology and that productivity benefits of emerging green technologies may take time to materialize as production processes adjust.

### Benchmarking green transition against the ICT revolution
- ICT as a comparator:
  - ICT patents have an impact on real economic activity comparable to that of green patents.
  - Important differences:
    - ICTs were general purpose technologies adopted largely for profit motives.
    - Low-carbon technologies (LCTs) are more sector-specific and are being deployed in response to policies mandating reductions in carbon-intensive technologies.
  - LCTs can affect vast sectors of the economy by benefiting key upstream sectors such as energy and transportation.
  - Like ICT, LCTs exhibit strong knowledge spillovers as measured by citations.
- Timing and dynamics:
  - During the ICT revolution period (1995–2005), the impact of ICT patent filings on GDP was lower than in subsequent years.
  - Both ICT and green innovations initially boost economic activity primarily through higher investment; TFP gains accumulate more progressively.
  - The impact on TFP during the ICT revolution was almost half to two-thirds lower than its average impact over the whole sample period.
- Overall implication:
  - New technologies initially increase economic activity mostly through investment, likely due to transition costs, with potential for higher productivity benefits once technologies are incorporated at scale.

### Role of environmental and trade policies in innovation and diffusion
- Climate policy evolution:
  - Countries introduced climate policies following the Kyoto Protocol and IPCC assessment reports; adoption accelerated in high-income countries and later in middle- and low-income countries.
  - There are noticeable differences in the number and composition of climate policies across income groups.
- Policy classification used in the SDN:
  - Three types of climate policies distinguished: those that generate government expenses (expenditure), those that generate government revenue (revenue), and those that are government-budget-neutral.
  - Economists (including IMF) recommend carbon pricing as a key building block, but countries apply a broad set of policy instruments across sectors.
- Findings from the Climate Policy Database (CPD):
  - Regulations and other government-budget-neutral policies are the most frequently used instruments, followed by expenditure policies (including subsidies).
  - Revenue policies are relatively few in number in the CPD coverage.
  - Limitation: CPD does not reflect policy stringency; stringency can be better captured by the OECD Environmental Policy Stringency (EPS) Index, which has smaller country and policy coverage but better captures stringency.
  - Countries covered by countrywide carbon taxes or emissions trading systems are higher on the OECD's EPS Index in 2020 than countries without carbon taxes.
- Composition differences by income group:
  - Although budget-neutral measures are most common in all countries, almost one-fifth of policies in advanced economies generate government expenditure (compared with 17 percent and 10 percent in middle-income and low-income countries, respectively).
  - Revenue-generating measures are used more frequently in advanced economies and, to a lesser extent, in middle-income countries.
  - Interpretation: greater fiscal space and more advanced stages of climate policy in advanced economies.
- Trade policy and diffusion:
  - Analysis examines average applied tariffs for LCT goods and other goods across income groups for periods 2000–07, 2010–15, and 2015–21.
  - The SDN also uses definitions and approaches from Pigato and others (2020) and Howell and others (2023) when analyzing trade-related diffusion.
- Carbon pricing initiatives:
  - There are 39 countrywide carbon taxes or emissions-trading systems and 73 active carbon pricing initiatives at the national and subnational levels.

*Sources: European Patent Office Worldwide Patent Statistical Database (PATSTAT); Hasna and others (forthcoming); IEA (2020a); Pigato and others (2020); Popp and others (2020); Dechezleprêtre, Ménière, and Mohnen (2017).*

### 3. Heterogeneity across Income

### 3. Heterogeneity across Income Groups by Policy Instrument

### Data and Methodological Notes
- Sample: 42 countries comprising OECD countries and BRICS, excluding India, during 1990–2019.
- Empirical framework: local projection method (Jordà 2005) to estimate dynamic effects of changes in climate policy stocks on patent filings (dependent variable: log of patents per capita over the horizon considered).
- Key controls and augmentations: time trend, global oil prices, key dates of major climate policy events (IPCC reports to Paris Agreement), and a measure of global policies.
- Data sources: Climate Policy Database (CPD); European Patent Office PATSTAT; IMF World Economic Outlook; World Bank; UNCTAD TRAINS.
- Limitations: CPD does not capture policy intensity nor direct emissions impact, complicating magnitude comparisons across policy instruments; results are qualitative indicators of directional relationships rather than precise magnitudes across instrument types.

### Tariffs, Trade Barriers, and Income-Group Differences
- LCT goods tariffs and trade barriers:
  - LCT tariffs are typically lower than tariffs on non-LCT goods across all income groups.
  - LCT applied tariffs are noticeably higher on average in middle- and low-income countries than in high-income countries.
  - Progress in tariff reductions has stalled in recent years; LCT applied tariffs have actually increased.
  - Nontariff barriers for LCT goods are higher than for non-LCT goods in upper-middle-income countries.

### Climate Policies and Patent Filings — Key Findings
- Aggregate effects of climate policies:
  - A one standard deviation increase in climate policies boosts green patent filings by 2.9 percent in two years and up to 10.3 percent in five years.
  - A one standard deviation increase in the Environmental Policy Stringency (EPS) Index raises green patent filings by 2.5 percent in two years and up to 7.2 percent in five years.
  - A one standard deviation increase in the stock of climate policies increases total patent filings by 6.9 percent after five years.
  - Climate policies increase the share of green filings in total filings (green filings respond more strongly than total filings).
- Sectoral evidence (energy sector):
  - Following an increase in the stock of climate policies, the number of green and gray patents as a share of total energy patent filings increases; the share of carbon-intensive energy patents decreases.
- Role of global oil prices:
  - Lower oil prices are associated with less green innovation; the fracking-driven fall in oil prices in the 2010s is linked to a slowdown in green innovation.

### Effectiveness of Policy Instruments (impacts measured two and four years after shocks)
- Government-neutral policies:
  - Regulations: a one standard deviation increase in the stock of regulations can increase green patent filings by 5 percent four years after the change.
- Revenue-generating policies:
  - Quantity-targeting instruments (for example, emissions-trading schemes): increase green patent filings by 4.7 percent after four years.
  - Pricing-based revenue measures (carbon taxes and fees): weak short- to medium-term effect in this analysis.
- Expenditure measures:
  - Feed-in tariffs (FIT) and R&D subsidies: increase green patents by 5.6 percent in four years.
  - Other expenditure measures: not found to be conducive to innovation in this analysis.
- Interpretation:
  - Regulations, emissions-quantity instruments, and targeted expenditure support (FIT & subsidies) are most effective at stimulating green patenting in the medium term.
  - The weak short-run effect of price-based measures is consistent with other studies and may reflect the short horizon and aggregate data; theoretical models suggest carbon taxes matter over the long term.

### Role of Global Events and Global Policies
- Key climate policy events (IPCC first report in 1990 through the Paris Agreement in 2015) amplify the impact of domestic policies:
  - Key events almost double the medium-term effect of domestic policies on green patent filings.
- Global policies vs. domestic policies:
  - A one standard deviation increase in distance-weighted global policies increases domestic patent filings by close to 20 percent after five years.
  - Inclusion of global policies in regressions does not materially change most domestic policy effects, though it weakens medium-term effects of regulations and nonregulatory revenue-neutral policies.
- Channels of influence:
  - Market-size effect: incentives to develop LCTs increase with the size of potential markets created by policies in large countries (example: bans on future internal combustion engine vehicle sales).
  - Technology spillovers: domestic patenting captures imported inventions and subsequent domestic filings.

### Innovation, Trade, FDI, and Technology Transfer
- Patents are a limited measure of knowledge transfer; trade and FDI are key channels for LCT deployment and diffusion.
- FDI and trade:
  - Imports from knowledge-producing countries embody frontier technologies and give local producers access to advanced goods.
  - FDI provides financing and facilitates technological transfer through affiliate-parent interactions and linkages with local firms.
- Evidence on firm performance and emissions:
  - Foreign-owned firms in emerging markets exhibit lower carbon intensity than domestic firms in high-emissions sectors and use less energy than local firms.
  - Capelle and others (forthcoming): keeping production constant, emissions from firms in emerging market and developing economies could be reduced by 70 percent if high-emissions-intensity firms converged to the median level observed in advanced economy firms in the same narrowly defined industry.
- Economic gains from LCT deployment:
  - Policies that stimulate LCT deployment can positively affect production and consumption in emerging market and developing economies.
  - Potential mitigation of gains arises when efficiency improvements accrue partly to parent firms via higher profits; nevertheless, technology transfers and spillovers can lead to GDP and productivity gains in host countries.
- Government role in directing innovation:
  - Governments can direct research toward socially desirable areas through policies that create markets and expectations for LCTs.
  - Large-scale, long-term government-funded basic research has been instrumental in breakthroughs (examples cited in text include solar energy and COVID-19 vaccine financing).
  - Critical technologies requiring substantial development include negative emissions technologies and technologies to reduce emissions in the agricultural sector.

*Staff Discussion Notes: Green Innovation and Diffusion: Policies to Accelerate Them and Expected Impact on Macroeconomic and Firm-level Performance — INTERNATIONAL MONETARY FUND*

### 1. Emissions intensities

### 1. Emissions intensities

### Scope, data, and methodology
- Analysis focuses on emissions of scope 1 (direct) and 2 (indirect, from generation of purchased energy).
- Uses four-digit Standard Industrial Classification and 2019 data.
- Sample is biased toward large listed firms that report emissions.
- The financial, utilities, and energy sectors are excluded.
- Industry fixed effects are included.
- Panel 1 plots show the 10th, 25th, 50th, 75th, and 90th percentiles of the distribution (logs of emissions over revenue).

### Emissions counterfactuals for AEs and EMDEs
- Within-industry counterfactuals are constructed by assuming that all AE and EMDE firms with emissions intensities above the AE median reduce their intensities to the level of the median AE firm, keeping their production constant.
- AE = advanced economy; EMDE = emerging market and developing economy.

### Key methodological notes
- Results and plots conditional on industry fixed effects and the restricted firm sample noted above.
- Source: Capelle and others (forthcoming).

### _Source: sdnea2023008 - 1. Emissions intensities (staff discussion notes)_  

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### LCT diffusion, trade, and green FDI (excerpts related to emissions intensities context)

### Trends in LCT trade and green FDI
- LCT imports recovered dynamism since 2016, especially in advanced economies.
- Low-income countries closed most of the gap with advanced economies by 2015 in LCT imports.
- Emerging market and developing economies such as China, Mexico, and Vietnam have high shares of LCT imports.
- Global green FDI has accelerated since 2016 and "tripled as a share of global GDP between 2014 and 2022."
- Green FDI as a share of total greenfield FDI: "10 percent of total greenfield FDI between 2014 and 2017, and by 2022 it had reached 40 percent of total investment."

### Impact of domestic climate policies on LCT trade and green FDI
- A one standard deviation increase in the stock of climate policies:
  - increases real LCT imports by about 1.5 percent on impact;
  - increases LCT imports to GDP by about 0.5 percent on impact.
- Revenue and expenditure measures yield medium-term increases in LCT imports; regulations are nonsignificant; nonbinding neutral policies have a negative effect (see Online Annex III).
- An increase in the number of climate policies leads to higher green FDI inflows as a share of GDP.
- Climate policies may reduce nongreen FDI inflows, although the effect is statistically insignificant; aggregate effect on total greenfield investment is relatively negligible.
- Gravity estimations: a one standard deviation change in the stock of climate policies in the recipient country is estimated to increase bilateral green FDI inflows by 7 percent, on average.
- Effects by income group:
  - Climate policies act as a catalyst for green FDI inflows in both AEs and EMDEs.
  - Effects are somewhat stronger in EMDEs for the value of inflows, but smaller for the number of projects.

### Policy instruments and heterogeneous effects
- Government revenue and expenditure measures have a strong positive impact on green FDI inflows and projects in the destination country.
- Nonbinding neutral policies have a nonsignificant impact.
- Lower tariffs on LCT goods:
  - A one standard deviation reduction in LCT tariffs (equivalent to closing one-third of the gap between EMDEs and AEs in one year) is associated with a 4 percent increase in the LCT-trade-to-GDP ratio and a 6 percent increase in LCT imports.
  - A one standard deviation decrease in LCT tariffs in the recipient country yields a 15 percent increase in bilateral FDI flows (values).
  - Lower LCT tariffs also increase green FDI inflows and green projects.

### Cross-border effects of source-country climate policies
- Climate policies in source countries are linked to higher green FDI outflows and more green projects abroad (positive cross-border spillovers).
- Higher Environmental Policy Stringency (EPS) Index values in source countries are associated with higher green FDI outflows.
- One exception: higher levels of expenditure measures (such as subsidies) in source countries are associated with lower green FDI outflows and fewer green FDI projects abroad (short- to medium-term effect).
- EPS subcomponents:
  - Higher R&D subsidies in source countries are associated with lower green FDI outflows.
  - Higher intensity in the “certificates and taxes” category is associated with higher green FDI outflows.
- Feed-in tariffs show a positive, albeit only marginally significant, effect on green FDI outflows.
- These findings point to potential trade-offs between short- and long-term deployment objectives when designing subsidy and expenditure measures.

### Aggregate and interpretive findings
- Trade policy (lower LCT tariffs) appears to be a key lever to boost LCT diffusion through both imports and green FDI by reducing the cost of the technology, with substantial estimated economic effects.
- The enactment of climate policies in high-income source countries can boost deployment of LCTs in EMDEs via increased green FDI outflows.
- Policymakers face trade-offs: certain expenditure measures can attract green FDI inflows to the implementing country but may reduce green FDI outflows to other countries in the short to medium term.

*Source: sdnea2023008 - 1. Emissions intensities (staff discussion notes)*

### 1. The  Impact  of  Climate  Policies  in  the  Source  Country

### 1. The  Impact  of  Climate  Policies  in  the  Source  Country

### Regression evidence on bilateral flows and projects
- Data sources: Climate Policy Database; Financial Times fDi Markets database; and United Nations Conference on Trade and Development (UNCTAD) Trade Analysis Information System (TRAINS) database.
- Panel 1 (effect of a one standard deviation increase in the log of climate policies in the source country):
  - Outcome: percent increase in bilateral green FDI and in green FDI projects abroad.
  - Chart tick values shown: -0.3, -0.2, -0.1, 0.0, 0.1, 0.2, 0.3, 0.4, 0.5.
  - Listed policy group effects (as labeled): Overall effect; Revenue; Expenditure; Nonregulatory; Regulation.
- Panel 2 (effect of a one standard deviation change in the source country’s EPS and subcomponents):
  - Outcome: percent increase in bilateral flows.
  - EPS components and subcomponents shown: Overall effect; Revenue; Expenditure; Nonregulatory; Regulation.
  - Subcomponent labels displayed: EPS; Taxes+cert.; Regs; FITs; R&D subsidies.
  - Chart tick values shown for panel 2: -0.15, -0.10, -0.05, 0.00, 0.05, 0.10, 0.15.

### Key findings on policy types and channels
- Climate policies can accelerate patenting in clean technologies and spark higher diffusion through trade and FDI.
- Revenue measures (specifically those restricting emissions quantities, such as emissions-trading systems) and expenditure measures associated with R&D subsidies and feed-in tariffs:
  - Bolster both green patents and green FDI inflows.
- Regulations:
  - Lead to more green patents.
- Subsidies:
  - May reduce green FDI outflows despite potential to lower production costs and boost LCT trade.
- Tariffs on LCT goods:
  - Adversely impact deployment of green technologies; lower tariffs on LCT goods strongly promote deployment through both trade and FDI, especially in emerging market and developing economies.

### International spillovers and coordination
- Domestic patenting reacts to global climate policies, indicating benefits from synchronized climate action through market size effects and technology spillovers.
- Countries implementing climate policies increase the share of green FDI in their overall outflows, suggesting export of low-carbon technologies to other countries.
- Potential tensions and risks:
  - Subsidy use can create tensions between domestic and global climate objectives and may be exacerbated by protectionist measures.
  - A subsidy race could hamper deployment of LCTs to emerging market and developing economies given reduced fiscal space.
  - Policies should be consistent with World Trade Organization rules; avoid local content requirements.
  - Geoeconomic fragmentation can erode incentives for green innovation and slow diffusion of green technologies.
- Policy coordination objectives:
  - Mitigate adverse impact of subsidies.
  - Prevent a subsidy race that impedes global LCT deployment.
  - Ensure WTO-consistent policy design.

### Conclusions on macroeconomic and innovation impacts
- Green innovation:
  - Can boost medium-term economic growth, especially through higher investment.
  - Promotes economic activity in the short to medium term by stimulating investment and total innovation and can buffer potential adverse effects of climate policies.
- Aggregate productivity:
  - The analysis in this SDN does not find a positive impact of green innovation on aggregate productivity over the study horizon, which may reflect a relatively short horizon; pro-productivity impacts of technological breakthroughs may take time to materialize.
- Policy complements:
  - Expansion in the stock of climate policies and lower trade costs for LCTs are both required to boost green innovation and accelerate deployment of LCTs.

### Box 1 — Innovating toward Net Zero Emissions: The Role of Government
- Dual government role:
  - Scale up use of existing LCTs and invest in basic research for LCTs that may take a long time to develop.
- Quantitative statements cited:
  - "Over 80 percent of the emissions reductions needed by 2030 can be achieved if the use of existing technologies can be scaled up (Pigato and others 2020)."
  - "75 percent of the LCTs needed by 2050 either need to be developed beyond the prototype level or require R&D investment to become commercially viable (IEA 2020a)."
- Phased government involvement:
  - Early stage: fund basic research and assure market demand (examples: US government support for solar energy post-1979; government role in early COVID-19 vaccine research).
  - Viable-but-not-competitive stage: subsidies can scale up production and achieve cost reductions (examples: Japan and Germany subsidy programs for solar; subsequent mass production in China).
- Key technologies needing active government intervention:
  - Green hydrogen for zero-carbon fuels in long-distance aviation and maritime transport.
  - Negative emissions technologies (NETs) such as direct air capture; NET investment must start soon despite expected scale-up in the middle of the century.

### Box 2 — Technology Transfer and the Role of International Organizations
- Potential impact of technology transfer:
  - If all firms with emissions intensity above the 25th percentile could improve to the 25th percentile, emissions in advanced economies could decrease by 55 percent, assuming unchanged production; reductions would be larger in emerging market and developing economies.
- Private-sector-led transfer is most common, but government-led examples exist:
  - Montreal Protocol (technology transfer organized by the World Bank and the United Nations).
  - Green Revolution (role of Consultative Group on International Agricultural Research).
- Current institutional efforts for LCT transfer:
  - Climate Technology Centre and Network; Green Climate Fund; Technology Executive Committee.
- Compensation and intellectual property concerns:
  - Innovators require compensation if patent exploitation rights are granted to others; purchasing rights can be expensive.
  - A weaker WTO patent waiver during COVID-19 vaccines had limited effect.
  - Direct research by international organizations (as in the Green Revolution) is an important alternative to patent donation.

*International Monetary Fund — Staff Discussion Notes (Green Innovation and Diffusion: Policies to Accelerate Them and Expected Impact on Macroeconomic and Firm-level Performance)*

### References

### References

### Major themes covered
- Directed technical change, innovation, and the environment (e.g., “The Environment and Directed Technical Change”; “Transition to Clean Technology”; “A Model of Growth through Creative Destruction”).
- Carbon pricing, carbon taxes, and macroeconomic effects (e.g., “Carbon Taxes, Path Dependency, and Directed Technical Change: Evidence from the Auto Industry”; “Measuring the Macroeconomic Impact of Carbon Taxes”; “The Macroeconomic Effects of a Carbon Tax to Meet the US Paris Agreement Target: The Role of Firm Creation and Technology Adoption”).
- Environmental policy impacts on firm- and sector-level productivity and innovation (e.g., “Environmental Policies and Productivity Growth: Evidence across Industries and Firms”; “The Impact of Environmental Policy on Innovation in Clean Technologies”).
- Green investment, green FDI, and technology transfer (e.g., “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages”; “Measuring CO2 Emissions of Foreign Direct Investment”; “Trade in Low-Carbon Technology Products”).
- Renewable energy cost dynamics and low-carbon technology scaling (e.g., IEA “Energy Technology Perspectives 2020”; IRENA “Renewable Power Generation Costs in 2021”; “How Solar Energy Became Cheap: A Model for Low-Carbon Innovation”).
- Policy sequencing, structural reforms, and fiscal measures for climate mitigation (e.g., “Structural Reforms to Accelerate Growth, Ease Policy Trade-offs, and Support the Green Transition in EMDEs”; IMF Fiscal Monitor and G20 notes).

### Types of sources and publication outlets
- Academic journals: American Economic Review; Journal of Political Economy; Review of Economics and Statistics; Journal of Environmental Economics and Management; Journal of International Economics; Energy Journal; Journal of Economic Perspectives; Environmental Research Letters; Nature Climate Change; Energy Policy.
- Working papers and discussion notes: IMF Staff Discussion Note; IMF Working Paper; NBER Working Paper; LSE Working Paper; OECD Environment Working Paper.
- Institutional reports and flagship publications: International Energy Agency (IEA) reports; International Renewable Energy Agency (IRENA) report; World Bank publications; IPCC report; IMF Fiscal Monitor; IMF Global Financial Stability Report.
- Books and policy briefs: Power and Progress: Our Thousand-Year Struggle over Technology and Prosperity; The Entrepreneurial State; How Solar Energy Became Cheap; PIIE Policy Brief.

### Representative cited works (authors and exact titles preserved)
- Acemolgu, Daron, Philippe Aghion, Leonardo Bursztyn, and David Hemous. 2012. “The Environment and Directed Technical Change.” American Economic Review 102 (1): 131–66.
- Acemolgu, Daron, Ufuk Akcigit, Douglas Hanley, and William Kerr. 2016. “Transition to Clean Technology.” Journal of Political Economy 124 (1): 52–104.
- Aghion, Philippe, Antoine Dechezleprêtre, Ralf Martin, and John Van Reenen. 2016. “Carbon Taxes, Path Dependency, and Directed Technical Change: Evidence from the Auto Industry.” Journal of Political Economy 124 (1): 1–51.
- Albrizio, Silvia, Tomasz Koźluk, and Vera Zipperer. 2017. “Environmental Policies and Productivity Growth: Evidence across Industries and Firms.” Journal of Environmental Economics and Management 81: 209–26.
- Battarelli, Luca, Davide Furceri, Pietro Pizzuto, and Nadia Shakoor. 2023. "Environmental Policies and Innovation in Renewable Energy." IMF Working Paper 2023/180, International Monetary Fund, Washington, DC.
- Borga, María, Kenneth Egesa, Dmitri Entaltsev, Gregory Legoff, Achille Pegoue, and Alberto Sánchez Rodelgo. 2023. “Measuring CO2 Emissions of Foreign Direct Investment.” In Data for a Greener World: A Guide for Practitioners and Policymakers. Washington, DC: International Monetary Fund.
- International Energy Agency (IEA). 2020a. “Energy Technology Perspectives 2020.” IEA flagship report. Paris.
- International Monetary Fund (IMF). 2019. Fiscal Monitor: How to Mitigate Climate Change. Washington, DC, October.
- International Monetary Fund (IMF). 2023a. Fiscal Monitor: Climate Crossroads: Fiscal Policies in a Warming World. Washington, DC, October.
- International Renewable Energy Agency (IRENA). 2022. “Renewable Power Generation Costs in 2021.” Abu Dhabi.
- Nemet, Gregory F. 2019. How Solar Energy Became Cheap: A Model for Low-Carbon Innovation. New York: Routledge.
- Pigato, Miria, Simon Black, Damien Dussaux, Zhimin Mao, Miles McKenna, Ryan Rafaty, and Simon Touboul. 2020. “Technology Transfer and Innovation for Low-Carbon Development.” Washington, DC: World Bank.
- Rogelj, Joeri, Drew Shindell, and Kejun Jiang. 2018. “Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development.” IPCC report, Intergovernmental Panel on Climate Change, New York.

### Notable recurring institutions and research programs
- International Monetary Fund (IMF)
- International Energy Agency (IEA)
- International Renewable Energy Agency (IRENA)
- World Bank
- OECD
- National Bureau of Economic Research (NBER)
- London School of Economics (LSE)
- Intergovernmental Panel on Climate Change (IPCC)

*Green Innovation and Diffusion: Policies to Accelerate Them and Expected Impact on Macroeconomic and Firm-Level Performance — Staff Discussion Note No. SDN/2023/008*

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_Source: https://www.imf.org/-/media/files/publications/sdn/2023/english/sdnea2023008.pdf_