Clean innovation will be increasingly critical to Canada's economic and environmental well-being in a changing world. On March 31, 2015, Sustainable Prosperity and partners brought together Canadian and global experts from academia, industry, government, and NGOs to discuss how Canada can accelerate the pace of clean innovation across all parts of the economy, with a particular focus on the key role that governments can play — through smart policy, investment, spending, etc. The videos of the conference sessions are now available. For each week in June, a new blog will be posted, covering each of the 4 conference sessions. This is Blog Post 2 of 4 (Stay tuned in future weeks for Blog 3 and and Blog 4).

While Session 1 raised the issue of faltering innovation in Canada, Session 2 speakers (Dr. Richard Newell, Duke University; Dr. Richard Hawkins, University of Calgary; Dr. Nick Johnstone, OECD Structural Policy Division; and Geoff McCarney, PhD candidate at Columbia University and Sustainable Prosperity’s Research Director) shed light on why this has occurred and how it can be corrected by examining the links between public policy and clean innovation.

Richard Newell outlined the 3 major energy sustainability challenges that we face. The first challenge is economic − the growth of the Canadian economy (and the global economy) has been fuelled by increasing energy yields, providing ever-growing access to affordable energy. Innovations boosting energy efficiency are necessary to maintain the economic growth we have enjoyed for centuries and clean energy innovations are essential for Canadian exports to remain competitive. The second challenge is reducing environmental impact, particularly climate change − although significant progress has been made in renewable energy technologies, our GHG reduction targets will not be met unless abundant affordable low-carbon energy can be brought to market. Third, energy security, which at its core concerns the long-term reliability of our energy supply, could be greatly improved by moving towards more sustainable and less finite energy sources.

In response to these challenges, Newell proposes that policies to accelerate clean innovation be structured with three key elements:

1. Supporting fundamental research is essential due to factors (long-term decision horizons, uncertain returns, positive knowledge spillovers) that limit incentives for private-sector investment in such research.

2. Ensuring market demand is important for two reasons. The funds paid by purchasers of innovative products fuel the profit motive that drives private companies to innovate. Additionally, the preferences and consumption habits of these purchasers usually directs innovation in the most efficient way. Policies fostering demand for clean innovation products include carbon taxes and carbon credit schemes that put a price on carbon.

3. Maintaining a competitive private sector is essential since, despite the important role played by government procurement and direct funding, private companies contribute the most resources to R&D. This is achieved through a host of policy tools, from international free trade agreements to competition policy, to intellectual property (IP) regimes. However, some of these policies need reshaping, a topic addressed in session 3.

The second panelist, Richard Hawkins, took a high-level view of Canada’s stalled innovation; in his view, Canada must fundamentally shift its approach to innovation. Beginning from a historical perspective, Hawkins pointed out the many successes of the vertically-oriented approach to industrial problem-solving that the Canadian government used to take prior to 1985. This problem-oriented sector-based approach attempted to direct entire industries in one direction or the other, towards achieving specific goals. Examples of such goals include creating Canada’s robust aerospace industry and even the creation of the Alberta oil sands industry.

Since 1985 however, Canadian governments have taken a more “horizontal” approach in which, rather than crafting policies directed towards particular industry goals, governments have favoured generic policies and regulatory instruments. Additionally, governments are supporting private companies through subsidies and tax credits, but without coordinating the efforts and resources of these companies towards any resemblance of a common goal.

Hawkins points-out that while the vertical approach succeeded in creating entire industries that would not have come into existence on their own, the modern horizontal approach has not achieved anything noteworthy on this scale. Since the mid-1980s, Canada’s economy has become increasingly dependent on the United States, with more innovation occurring in American head-offices rather than within the Canadian subsidiaries of those companies. According to Hawkins, to accelerate innovation in Canada, the federal government needs to adopt a more vertical “industrial-planning” approach to solving problems, and rely less on our economic relationship with the US – the government should redirect resources to big endeavours that have larger positive impacts. To quote Dr. Hawkins, “Why not make clean innovation our moonshot? Why don’t we propose this as the project for the nation, something to organize ourselves around?”

The third panelist, Nick Johnstone, confirmed that Canada does indeed have a low rate of innovation as reflected by the number of patents issued, however, performs well in some emerging clean tech industries. A major source for this innovation stagnation is a policy environment that encourages the longevity of industry incumbents, companies who have been around for longer. According to Johnstone, these incumbents are often less innovative than younger companies, and prevent the spawning of innovative new enterprise by locking-up scarce resources. To rectify this innovation stagnation, he offered five basic qualities that clean innovation policy should possess:

1. Policies must be stringent, making the price of not innovating costlier than merely paying non-compliance fees.

2. Flexibility induces companies to come up with novel solutions best suited to their particular situation.

3. Predictable policy makes for more certainty and stability when companies are taking a chance on new innovation.

4. Incidence − the degree to which the policy effectively targets the desired objective − is vital.

5. Policy depth − taking into account the whole spectrum of emissions (right down to zero emissions) is important to maintain the incentive to improve for companies at all stages of progress.

Johnstone also stressed that in order for policies targeting clean innovation to work, the underlying generic policy framework, particularly relating to investment in basic research, would need to be reshaped to address knowledge market failures that undermine innovation. Further, the IP regime must be reformulated to address the new challenges arising from open innovation. Governments should encourage international research partnerships and research mobility to boost the occurrence and proliferation of new ideas.

Geoff McCarney, the final panelist, raised two issues to consider when introducing some of the policies suggested by the first three panelists. First, he suggested that policy decisions are capable of supplying the “small catastrophe” that Peter Nicholson had suggested may be required to disrupt Canada’s low innovation equilibrium in Session 1(external link), by creating an imperative to find clean innovation solutions. Second, he raised the question of whether or not Canada currently has the institutional structure to adopt policy recommendations made by the three speakers.

This second session features a number of opinions on ways in which Canada’s innovation policy should be designed. Watch the session and tell us what you think on Facebook or tweet us @sustpro. To learn about perspectives from industry, government, funding bodies and academia, stay tuned for next week’ s blog covering Session 3: Innovation Policy Perspectives, or watch the video here.

Craig Milne is a summer policy team intern at Sustainable Prosperity.