Climate change policy, innovation and growth

Headline issue

New clean technologies are urgently required to meet long-term global climate goals. Simulating the development of these technologies has become worldwide policy priority. This policy brief uses the latest patent data to evaluate the effect of climate change policies on the development of clean technologies and their broader impact on the economy.

Key findings

Carbon pricing causes a large and rapid increase in clean-innovation. The European Union Emissions Trading System (EU ETS) significantly increased innovation in low-carbon technologies and the effect began quickly after its introduction.

Germany and the Scandinavian countries are at the forefront of innovation in Europe. The UK is approximately midway in the ranking, ahead of countries such as Belgium, Norway, Italy, Spain and Poland, but behind France, the Netherlands and others.

Low-carbon innovation has larger economic benefits than innovation in other technologies. Low-carbon innovations generate technological improvements in a wide range of sectors, similar to the way that IT innovations benefit sectors other than computing. This can help to offset the costs of climate change regulations and generate economic growth.

Current deployment efforts should be augmented with additional R&D support, such that the marginal euro/pound spent on low-carbon technologies should go to R&D rather than deployment. European countries have been emphasising technology deployment through feed-in tariffs for renewable energy production over direct R&D support. This approach may not provide sufficient stimulus to develop the next generation of low-carbon technologies.

Public spending on low-carbon R&D needs to at least double over the next few decades. Some of the greatest funding increases are needed in low-carbon transportation, carbon capture and storage (CCS), smart grids and industrial energy efficiency.

Countries should be encouraged to set public R&D targets as far ahead as 2030. Targets would vary between countries and may need to be set within a range, but such long-term targets would reduce public funding spikes and associated adjustment costs, and ultimately could reduce the overall cost of decarbonisation.