Technological change and the Environment

Abstract

Environmental policy discussions increasingly focus on issues related to technological change. This is partly because the environmental consequences of social activity are frequently affected by the rate and direction of technological change, and partly because environmental policy interventions can themselves create constraints and incentives that have significant effects on the path of technological progress. This paper, prepared as a chapter draft for the forthcoming Handbook of Environmental Economics (North-Holland/Elsevier Science), summarizes current thinking on technological change in the broader economics literature, surveys the growing economic literature on the interaction between technology and the environment, and explores the normative implications of these analyses. We begin with a brief overview of the economics of technological change, and then examine theory and empirical evidence on invention, innovation, and diffusion and the related literature on the effects of environmental policy on the creation of new, environmentally friendly technology. We conclude with suggestions for further research on technological change and the environment.

Energy, the Environment, and Technological Change

“…Since environmental policy implicitly or explicitly makes environmental inputs more expensive, the "induced innovation" hypothesis suggests an important pathway for the interaction of environmental policy and technology, and for the introduction of impacts on technological change as a criterion for evaluation of different policy instruments. First articulated by Hicks (1932), for further background on induced innovation theory and evidence see Jaffe et al (2003), Binswanger and Ruttan (1978), and Thirtle and Ruttan (1987). For a recent review of empirical literature on the impacts of alternative policy instruments on technological change see Vollebergh (2007).…”

“…Within the field of environmental economics, the role of technological change has received much attention (Jaffe et al, 2003). The long-term nature of many environmental problems, such as climate change, makes understanding the evolution of technology an important part of projecting future policy impacts.…”

Optimal Climate Change Policies When Governments Cannot Commit

“…There is a large literature on how environmental policies and R&D policies interact in such a second-best world (e.g. Jaffee, Newell and Stavins (2003) for an excellent survey). This second-best argument is part of the justification given in the Stern Review for deploying a range of both environmental and R&D policy instruments.…”

Economic Instruments and Induced Innovation: The Case of End-of-Life Vehicles European Policies

“…Innovation is often the main response to environmental policies, and policy instruments may matter for 'induced innovation' effects, but shared conclusions about various theoretical and empirical issues are still lacking. An extensive review of theories and evidence on technological change and the environment, including the role of policy instruments, is presented in Jaffe et al (2003), who distinguish between analyses of 'induced innovation ' and 'evolutionary' approaches. Requate (2005) gives account of the present state of theoretical research on the dynamic incentives of different policy instruments, in particular economic instruments (EIs).…”