The Eighth Annual Global Conference on Environmental Taxation
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Workshop 3: Effects of EFR on technological innovation

Impacts of environmental policy instruments on technological change

Nils Axel Braathen, OECD, Environment Directorate, Paris, France

This paper will be based on a literature review prepared by Herman Vollebergh of Erasmus University, Rotterdam, cf. OECD (2007).

Despite the problems in measuring the impact of different instruments directly, an increasing amount of material documents the impact of environmental policy on technological change.

Among the papers reviewed by Vollebergh, some studies had looked at inducement in a more environmentally friendly direction at a fairly general level. This set of studies tries to measure the impact of environmental policy on technological change through commonly used indicators of invention, innovation and diffusion, such as R&D expenditures, patents and adoption of new technologies.

A second set of studies had analysed the likely effects of specific instruments on invention, innovation or diffusion of specific technologies. These studies often claim that effects on technological change exist, but their identification is not always convincing. Moreover, these studies are often difficult to compare.

Finally, a third set of studies had explicitly analysed whether price and quantity regulation have different impacts on technological change. For a long time, comparisons used only indirect evidence, given the lack of market-based instruments applied in practice and/or the availability of data. In particular, several studies looked at command-and-control (CAC) instruments versus energy price effects. Only recently have some papers become available that compare the direct effects of CAC instruments and market-based instruments, such as the SO2 allowance trading in the US.

It comes out of the literature review that one can observe changes in invention, innovation and diffusion of technologies stemming from environmental policy instruments; although the direct causal link is not always clear. Not only does environmental regulation increase the (implicit) price of pollution; there is also a clear positive impact on invention and innovation of new technologies.

Changes in energy prices have had strong impacts on invention, innovation and diffusion of more energy-efficient technologies which, in turn, have lowered emission levels as well.

The common distinction between CAC instruments and market-based instruments may sometimes be too general. Nevertheless, it is important to note that financial incentives for technology development are usually stronger under market-based instruments. Moreover, technology-related information requirements for public authorities are much lower when using market-based instruments. This reduces the space for rent-seeking and the potential to misdirect innovation. In addition, such instruments allow for more flexibility from the part of the regulated agent, reducing adjustment costs and optimising entry/exit and capital turnover rates.


The Impact of ETR on Innovation in the Environmental Industries:
Theory and Evidence

Prof. Paul Ekins, Alexandra Miltner, Policy Studies Institute, London, Great Britain

It is often asserted that environmental tax reform (ETR) – the most fundamental effect of which is to change the relative prices of technologies, activities and inputs which are environmentally damaging in relation to those which are not – will encourage innovation, and that this will have positive economic, as well as environmental, effects, but this is not obviously the case and evidence to support the hypothesis is scarce. This paper first looks at theories of innovation to ascertain what impact on innovation they assign to relative prices. It transpires that relative prices may play a role in innovation but that changing relative prices is neither a necessary nor sufficient condition for innovation. Environmentally relevant innovation involves change: in technologies, in relation to processes, products or environmental emissions; in management structures or procedures; or in consumer behaviour. Particularly important may be the role of relative prices in changing consumers’ and managements’ perceptions and take up of existing technologies (for example, in relation to energy efficiency), but policy measures apart from ETR may play as great or a greater role than this. The paper will assess evidence on this score by looking at the various ETRs that have taken place in six European countries: Denmark, Finland, Germany, Netherlands, Sweden and UK.

Finally the paper will assess the possible effects of ETR on the environmental industries sector. The sector has been the subject of considerable recent analysis (e.g. European Commission 2006) and is often perceived to be fast growing and to be a possible future source of exports and economic prosperity. It is generally accepted that one of the main drivers of growth of these industries is environmental regulation, and it may also be that it could be stimulated by ETR. This research will look in detail at the various component subsectors of the environmental industries, which span a wide range of different economic sectors, to evaluate which subsectors might be stimulated by what kinds of ETR, and what the wider economic impacts of such innovation might be. The paper will be part of the output of ongoing research funded by the Anglo-German Foundation, and will report interim results of that research.


Ecological Tax Reform in Estonia and
Innovation Perspectives in the Energy Sector

Dr. Eva Kraav, Silja Lupsik, Ministry of Environment, Estonia

The most important local energy source in Estonia is oil shale. Approximately 90% of mined oil shale is used for electricity production, 10% for shale oil production. Oil shale currently accounts for 90% of the energy resources used for electricity generation in Estonia. Production of oil shale-based electricity covers Estonian electricity consumption and enables also to export electricity. Oil shale based electricity production is competitive on the electricity market of the neighboring EU Member States.  

However, production of oil shale-based electricity has low energy efficiency, demands large investments for renovation and includes high environmental risks. Reducing environmental impact is the key issues in the development of the oil shale energy, because this is a system, which puts enormous pressure on natural environment. Oil shale energy is responsible of approximately 80% of air pollution and waste and uses ca 80% of total abstracted water in Estonia.

Resulting from high environmental impact, there are several factors that influence the electrical energy development in Estonia:

  • According to the transition periods agreed in the EU Treaty of Accession, Estonian companies are obliged to follow water, air and waste directive requirements. Due to non-compliance with these environmental requirements, Estonia has to close majority of its present electrical production capacities and to establish new ones.
  • The external costs include expenses related to exhaustion of natural resources and environmental damage, which are by environmental charges internalized into the electricity production price. Oil shale electricity production price includes oil shale extraction charge, mining water abstraction charge, air emission charges on burring the oil shale, cooling water abstraction charge and waste deposit charges. The share of such charges is more than 15% in the electricity production price in Estonia in 2007.

According to the EU accession treaty the electricity market has to be opened up to 35% by 2009 and fully opened by 2013. Estonian oil shale electricity needs to be competitive in this market. For this purpose production efficiency has to be increased and environmental costs have to be decreased, i.e. there is need to change production to reduce environmental charges as external costs in production price.

To achieve this, in Estonian oil shale energy production there is clear demand for technological innovation. Up to now several eco-effective technological solutions have been worked out or are presently being developed. The power generation technology has been changed – instead of pulverized firing technology, circulating fluidized bed technology is applied, increasing effectiveness of electricity production and reducing SO2 emissions to required level.

In the oil shale electricity stations, preparations are carried out to apply environmentally friendly technology of depositing oil shale ash. Technological innovations have occurred in using mining waste in road building or oil shale combustion wastes as a raw material in building material production.

By applying different environmental pollution charges, entrepreneurs are obliged to choose environmentally friendlier technology (such as damp and dry depositing of oil shale semi coke.

Sustainable development of the electricity production is supported within Ecological Tax Reform in Estonia. There are also several state programs to support energy saving and applying higher purchase price for renewable energy.


Learning-by-doing in the renewable energy equipment
industry or in renewable electricity production – why does it matter to differentiate?
A case study of Germany

Michael Kohlhaas, Katja Schuhmacher, German Institute for Economic Research, Berlin

One of the arguments forwarded in favor of introducing incentive-based environmental measures (such as environmental taxes or emissions trading) is their positive effect on innovation and technological change. This paper explores alternative ways of modeling one type of induced innovation, namely learning-by-doing, and the consequences for the assessment of environmental policies.

In economic models of energy or climate policy endogenous technological change is generally introduced through either investment in research and development or via learning-by-doing. Only few studies so far have been devoted to implementing learning effects into macroeconomic models. Conventionally, learning-by-doing effects in the renewable energy sector are allocated to the production of renewable based electricity. Our idea is that learning-by-doing also takes place in sectors that deliver capital goods to the renewable electricity sector, such as the production of machinery and equipment for renewable energy technologies.

In this paper, we introduce learning-by-doing on a sectoral basis in a top-down CGE model. LEAN_2000 is a two-region empirical general equilibrium model for Germany and the rest of the European Union with a particular emphasis on the representation of the energy markets and the simulation of policies to reduce CO2 emissions. We implement learning-by-doing alternatively in the renewable energy equipment industry and in renewable electricity production.

The analysis shows that it does matter to differentiate between learning by doing in the renewable energy equipment and in renewable electricity production. This is because of international trade effects associated with learning-by-doing in the machinery & equipment sector. Those effects and their stimulation of further production activity and learning get commonly overseen when implementing endogenous technological change in the form of learning-by-doing in top-down energy-environment models. If learning-by-doing affects export sectors and improves international competitiveness this has consequences for the economic assessment of the costs and benefits of climate policy.


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