How Green Innovation Can Stimulate Economies and Curb Emissions

IMF Blog, November 6, 2023

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Green innovation peaked at 10 percent of total patent filings in 2010 and has experienced a mild decline since.
Doubling green patent filings can boost gross domestic product by 1.7 percent after five years compared with a baseline scenario (conservative estimate).
Other estimates show up to four times the effect.
The economic benefits of green innovation:
- Flow mostly through increased investment in the first few years.
- Over time, accrue from cheaper energy and more energy-efficient production processes.
- Include less global warming and less frequent (and less costly) climate disasters.
Green innovation is associated with more innovation overall, not merely substitution of green technologies for other kinds, reflecting complementary innovation requirements.

A big increase in the number of climate policies tends to boost green patent filings by 10 percent within five years.
Most effective domestic policies identified include:
- Emissions-trading schemes that cap emissions.
- Feed-in-tariffs, which guarantee a minimum price for renewable energy producers.
- Government spending such as subsidies for research and development.
Global climate policies (for example, international pacts) result in much larger increases in green innovation than domestic initiatives alone.

Market size effect: innovators have greater incentive to develop low-carbon technologies when they can expect to sell into a much larger potential market in countries that adopted similar climate policies.
Technology diffusion: climate policies in other countries generate green innovations and knowledge that can be used domestically.
Policy certainty: synchronized policy action and international climate commitments create more confidence in governments’ commitment to address climate change, amplifying domestic policy impact.

Climate policies help spread low-carbon technologies to countries that are not sources of innovation via 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.
Lowering tariffs on low-carbon technologies can further enhance trade and FDI in green technologies; tariffs remain high in many middle- and low-income countries.

Protectionist measures would impede the broader spread of low-carbon technologies.
Protectionism reduces potential market size, which could stifle incentives for green innovation and lead to duplication of efforts across countries.
Climate policies that do not abide by international rules—such as local content requirements limiting subsidies to locally produced green goods—undermine trust in multilateral trade rules and could result in retaliatory measures.

Coordinated climate policies can both spur innovation in low-carbon technologies and help them spread to emerging market and developing economies.
Advanced economies, where most green innovation occurs, have an important responsibility to share technology so that emerging market and developing economies can adopt technologies faster.
Direct technology transfers to emerging market and developing economies offer a double dividend: reducing emissions and yielding economic benefits.

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