GREEN ECONOMY-1

Briefing Paper Innovation
Designing a green economy
Green economy policies, if properly designed, deliver social
and economic benefits by improving resource efficiency
and inducing domestic companies to innovate, which
may provide them with a competitive edge – first mover
advantage – vis-à-vis their competitors.
Two questions are at the heart of the pursuit of a green
economy:
• How can governments direct economies towards a
sustainable growth path?
• How can such policies benefit the society concerned?
Composite policies can be designed that enable a society to
pursue multiple objectives, combining environmental, growth
and competitiveness goals.1
Economies can be directed towards the green economy
by means of a combination of resource management and
innovation policies. In terms of resource management
policies, governments can place appropriate prices on
resources.
Appropriate resource prices, reflecting the path of
future scarcity, could foster green technological progress
by influencing the rate and direction of investment in
innovation.
Innovation policies tend to take the form of direct
investments by the government to relieve constraints
that hinder the development of new technologies. These
investments can generate new forms of capital, in order to
enable the industry to advance in a particular direction, or
they can relax conditions that are preventing change in the
society.
For developing countries, the green economy is not so much
a question of innovation at the technological frontier but
rather one of technology transfer and diffusion. By designing
1 This policy brief is a synthesis of an economic framework paper, “Green
Economy: Economic frameworks for thinking about growth, sustainability, and
the role of state intervention,” and academic discussions at the “Designing the
Green Economy” workshop, which was co-organized by UNEP and Centre for
International Environmental Studies (CIES), Graduate Institute of International and
Development Studies in Geneva.
Key messages
• Environmental regulation can induce innovation, which may turn into a competitive edge for domestic industries.
• Pricing resources could foster green technological progress by influencing the rate and direction of investment in innovation.
• Innovation policies can generate new forms of capital, pushing the industry to advance in a particular direction, or they can relax conditions that are preventing such change; they can also
help a country attain technological leadership.
• By designing appropriate policies, developing countries can strengthen their capacity to adapt green technologies to their national context and hence become receptive to a flow of
benefits from the green economy. 
• For developing countries, knowledge and technology creation and diffusion have the dual role of not just spreading innovation, but also enabling firms to identify, assimilate and use existing
local knowledge.
UNEP defines a green economy as one that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.
Appropriate policies, developing countries can strengthen their capacity to adapt green technologies according to their national context and hence become receptive to a flow of
benefits from the green economy. Resource pricing and management Societies initially rely heavily upon natural resources high levels of throughput from the natural environment in
the form of natural goods and services. With increasing development and growth, natural capital is progressively transformed into physical, human and social forms of capital.
This rebalancing of capital is one of the important drivers of development. For an economy to develop sustainably, its production structure must be flexible enough to allow for
substitution between scarce and abundant forms of capital. Technological change must also occur such that productivity is increased in the face of declining resource throughputs.
Some argue that for sustainability to occur, society should “invest all profits or rents from exhaustible resources in reproducible capital”. Whether or not this process can
endure indefinitely depends on the extent to which physical capital is substitutable for natural capital. But this is not enough. It is also necessary to combine the conversion of
capital stocks with directed technological progress. This consists of building the current capital stock around future resource scarcities so that companies can fully anticipate the path and direction of innovation. Then prices can be increasingly reflected over time, allowing companies
to choose the right forms of capital investment. Governments must play a leading role in ensuring that resource scarcity is reflected in the prices of inputs. In the presence of market imperfections, where market prices do not reflect real scarcities well, governments must act to direct
innovation down the right path toward sustainability, either through resource management or innovation policy. 

While innovations react to price signals, path dependency also plays an important role in determining the direction of investments. Companies invest not only in technology but
also in a particular variety of human capital that accompanies the applied technologies. As a consequence, the earlier a
company switches to green technologies, the less costly
the transition will be, and the less likely it will be to find
itself locked into dirty technologies. Thus, inducing change
towards a green economy will require government policies
that enable firms to respond to price signals in resource
management.
However, the prices of resources are not always a matter of
domestic interest or control. Where global environmental
goods such as climate change mitigation are concerned,
2 Hartwick, J. M. (1977). “Intergenerational equity and the investing of rents from exhaustible
resources”. The American Economic Review 67(5), 972–974.
policy outcomes rely on international cooperation. Effective
resource management policies will often require that
resources be managed at the level where they exist, whether
it is local, national, regional or global.
Directing innovation policy
Another area of policy that may be pursued is that of
directed innovation policy, where innovation is induced
through incentives other than resource pricing.
To shift economies towards a green economy is a complex
issue, one that comes from various sectors and different
types of technologies. For example, a challenge like climate
change has no single technological answer and the space
of potential solutions is large. This poses a challenge
involving the trade-off between knowledge creation versus
diffusion. For example, climate change problems require that
innovations, once they exist, also be applied widely and not
used by only a few technology leaders.
Additionally, much of the conventional wisdom about
innovation policy, such as notions of proprietary or
intellectual property rights, may not be sufficient in the case
of a green economy transformation, because such systems
may influence the rate but not the direction of innovation.
Also, they often only confer incentives upon those innovators
whose innovations are sold within existing markets.
Thus, the pursuit of sustainability may require some
combination of policies – resource management and direct
innovation – to fill the gaps left by the market.
Technological and policy leadership and
competitiveness
Appropriate resource management and innovation policies
may induce investments and innovation that result in the
country achieving “technological leadership”. Denmark
with its wind turbines and Japan with hybrid engine and
catalytic converter technologies are two good examples of
countries that embarked upon costly resource management
and innovation programmes early, and then benefited when
other states needed to license their proprietary technology.
Secondly, a country may attain “policy leadership”, when
a state adopts a particular resource management policy
that is later adopted by many others, resulting in national
investment responses similar to the initial adopters. Here
the technological leadership is a direct result of making
a particular policy move first, rather than the general
desirability of the technology involved.
However, forecasting future resource scarcities is an exercise
in speculation, always uncertain and never without risk.
Nevertheless, the point of investing in a green economy is to
UNEP launched its Green Economy Initiative in 2008, and is
currently supporting over 20 countries around the world
in their transition towards a green economy.
recognize those resource scarcities that are clear, unavoidable
and (currently) un-priced, and to be one of the first to build
these unavoidable scarcities into the economy.
Greening developing economies through
innovation
For most emerging markets and developing countries, the
competitiveness benefits of a green economy are not about
innovation or gaining first mover advantages. By investing in
their capacity to adapt green technologies in their countries,
these economies could become receptive to the benefits of
green innovation and avoid being locked into obsolete
technologies and capital stocks.
To benefit from technological transfer and diffusion,
developing countries need to invest in their capacity to adapt
technologies to their respective local settings, aided through
structured government interventions. In the case of least
developed countries (LDCs), support for adequate capacity
development would be required to benefit from such green
innovation.
Diffusion has the dual role of not just spreading innovations
but also enabling firms to identify, assimilate and use existing
local knowledge.
In order to do this smoothly across nations, it is important
for firms that hold proprietary rights to invest in their
diffusion, and for public systems to coexist with proprietary
ones in order to enable diffusion and licensing. It could
also be an opportunity for developing countries to enhance
their chances of success through policies, emphasizing
investments in human capital and the encouragement of
capital markets, as well as an openness to global technology
markets and general foreign direct investment.
Furthermore, policy-makers should facilitate information
flows about promising areas of science and engineering and
put in place incentives to build up research and development
capacity in local enterprises. This may require far more
complex policy interventions than for innovation itself.
International institutions
International trade and investment regulations can foster
the green economy by providing a solid and secure context
for flows of innovation and investment. Certainty regarding
trade and investment regulation is particularly important
to the green economy due to interlinked and global supply
chains.
At the same time, in international trade law, there is also a
set of rules that places constraints on the policy instruments
that might be used to support the transformation towards
a green economy: 1) the non-discrimination principle; 2)
government procurement regulation; and, 3) rules regarding
subsidies. For example, many innovation policies that are
well-designed for a green economy involve investments in
specific industries. It is not clear, however, whether such
investments in carefully selected industries are in violation
of trade rules regulating public procurement and public
subsidies favouring national industries.
The case of biofuel in Brazil
Brazil is currently a global leader in producing
ethanol-based biofuels and many countries are
following in order to reduce their dependency
on petroleum-based fuels. The success of its
programme has been largely driven by the
government’s support of the ethanol industry,
making it the largest bioenergy programme in
the world.
Government policies include:
• Tax benefits for alcohol-run cars
• Ceilings on ethanol prices (up to 65 per cent
of gasoline prices)
• Requirements on high ethanol fuel blends
• Mandates for ethanol-based fuelling stations
• Support for car companies to manufacture
vehicles that can use gasoline and ethanol for
fuel.
By the end of 1980, cars that could run on alcohol
accounted for 73 per cent of total car sales. Then
came the flex fuel car in 2003, where owners can
alter the ratio of ethanol to petroleum in order to
adapt to fluctuating prices of oil and sugar. As
a result, changes in petroleum prices no longer
affect the production of alcohol-run cars. Some
90 per cent of cars produced in Brazil today are
dual fuel.
The expansion of the biofuel industry has,
however, raised concerns that it could counteract
carbon savings through deforestation. In
addition, increased sugarcane production will
be needed to meet increasing ethanol demands,
which will have significant implications for
deforestation.
Nevertheless, Brazil’s success in transitioning
to biofuels has demonstrated both “policy
leadership” and “technological leadership” for
innovation.